How Much can I Borrow for a Mortgage?
Understanding your borrowing capacity is a crucial step in the home-buying process. It helps you set realistic expectations for the level of mortgage you’ll be able to attain and helps you narrow down your property search.
Here’s a quick guide on how lenders determine how much you can borrow, and what you can do to maximise your borrowing power.
Key Factors that Lenders Consider:
Income
Your income is the primary factor lenders consider when looking at your suitability for a mortgage with them. They look at your gross income (your total pre-tax earnings) which includes your salary, bonuses, commissions, and any other sources of income. The higher your income, the more you can potentially borrow.
Credit Score
Your credit score plays a significant role in determining your borrowing capacity. A higher credit score can help you secure a larger mortgage at a lower interest rate. Higher scores typically lead to better loan terms.
Scores above 700 are generally considered good; 750 and above are excellent.
Existing Debts
Lenders assess your current debt obligations, such as credit card debt, car loans, and personal loans.
They calculate what’s called a debt-to-income ratio (DTI) - which is your total monthly debt payments, divided by gross monthly income.
Lenders prefer a DTI ratio below 36%, with 43% being the upper limit in many cases.
Employment History
Stable employment history is crucial to getting a mortgage - lenders prefer borrowers who have been with the same employer for at least two years. Continuous employment in the same position or in the same field/industry also increases lender confidence.
Your Deposit
The amount you can put down as a deposit also impacts how much you can borrow. Typically, a deposit of 20% is ideal, but loans are now available with 10% and even 5% deposits.
If you can come up with a larger deposit, this essentially reduces a lender’s risk, which might result in you being offered better loan terms.
Maximizing Your Borrowing Power
To maximise your borrowing power, consider the following strategies:
Improve Your Credit Score: Pay down existing debts, avoid new credit inquiries, and correct any errors on your credit report.
Debt Reduction: Focus on paying down high-interest debts first.
Credit Report: Regularly review your credit report for inaccuracies.
Increase Your Income: Consider taking on additional work or negotiating a raise.
Additional Work: Part-time jobs or freelance work can supplement your income.
Negotiation: Request a salary increase if your job performance supports it.
Save for a Larger Deposit: The more you can put down upfront, the better your mortgage terms will be.
Savings Plan: Establish a dedicated savings account for your down payment.
Automatic Transfers: Set up automatic transfers to ensure consistent savings.
Reduce Debts: Pay off or consolidate your existing debts to lower your DTI ratio.
Debt Consolidation: Combining multiple debts into one can simplify payments and potentially reduce interest rates.
Budgeting: Create a strict budget to prioritise debt repayment.
Mortgage Brokers: Use a mortgage broker to present you to lenders on your behalf.
By understanding these factors and taking some proactive steps to improve your ‘wealth health’, you can increase your borrowing capacity and make your homeownership dreams a reality.
Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.