Factors Affecting Borrowing Capacity

I am often asked by friends and clients what affects borrowing capacity and how the Banks determine how much you can borrow.

I've listed a few of the main factors below:

1. Credit History: A poor credit history can be a major roadblock to obtaining loans. Lenders in Australia closely examine an individual's credit report, looking for any defaults, late payments, or bankruptcies.
2. Debt-to-Income Ratio: The debt-to-income ratio is a crucial metric that lenders use to evaluate an individual's ability to manage additional debt. High levels of existing debt relative to income may lead lenders to perceive a higher risk, limiting the amount they are willing to lend. This is where we see personal loans and large credit card limits having a major impact.
3. Employment Stability: A stable job and a consistent income stream are vital for securing a Home Mortgage. Newly self employed, still being on probation, frequent job changes or periods of unemployment can negatively impact borrowing capacity.
4. High Living Expenses: Elevated living expenses, especially when compared to income, can limit borrowing capacity. Lenders factor in the borrower's ability to cover day-to-day living costs alongside loan repayments. It might be time to reconsider that expensive gym membership or weekly lash appointment if you are considering applying for a loan!
5. Lack of Savings: Lenders look favorably upon borrowers with a healthy savings history. A lack of savings may suggest financial instability and an inability to handle unexpected expenses, impacting the borrower's creditworthiness.
6. Economic Conditions: Broader economic factors, such as interest rates and market conditions, can affect borrowing capacity. In times of economic uncertainty, lenders may tighten their criteria, making it more challenging for individuals to secure loans.

I am always keen to help potential borrowers where I can and provide a "no nonsense" approach to understanding your borrowing capacity and helping you navigate the world of finance.

Reach out for a chat on 0449266031 or [email protected]