Calculating your borrowing capacity
Understanding property finance πŸ‘‰15

Borrowing capacity is defined as how much money you can afford to borrow based on your disposable income. This assessment is carried out by lenders and is calculated using your net income minus expenses. Your disposable income is what you have left after paying your bills.

The first thing lenders will do is subtract your cost of living based on your marital status, dependents and postal code. This amount is determined by the HEM expense estimate. Every lender has what is known as the Household Expenditure Measure (HEM) which is an estimate of your monthly living expenses. It is based on necessary costs such as food, utilities, transport, childcare costs and communication, while also taking into account discretionary spending for takeaway food, holidays, and entertainment.

Thereafter, they’ll look at additional expenses like your rent or mortgage repayments, any personal loans, car leases and credit cards. After all those things are taken care of, they take a look at the disposable income you have left. This is money you have available to service new debts and loan repayments. This amount determines your borrowing capacity.

Calculating borrowing capacity

As a very rough estimate, your borrowing capacity should be approximately 6 times your income. For example, if you earn $100,000 per year, your borrowing capacity would be around $600,000. This shortcut method becomes less accurate if you have existing loans.

What is important to note here is that even a slight reduction in your credit card limits or paying out a car loan significantly increases your borrowing capacity to buy property. However, every lender is different, so it is best to seek professional help from a qualified mortgage broker to find out your options.

Stay tuned for more daily insights from Wealth Through Property.

~Daimien Patterson

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

Legal Disclaimer: This information ('the information') is presented for illustrative and educational purposes only. It is not presented nor should it be treated as real estate advice, legal advice, investment advice, or tax advice. All investments involve risk and potential loss of money. If you require advice in any of these fields you should contact a suitably qualified professional to assist and advise you. Your personal individual financial circumstances must be taken into account before you make any investment decision. We urge you to do this in conjunction with a suitably qualified professional. Daimien Patterson, IntegrityX Enterprises Pty Ltd, and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers do not guarantee your past, present or future investment results whether based on this information or otherwise. Daimien Patterson, IntegrityX Enterprises Pty Ltd and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers disclaim all liability for your purchase decisions. You should do your own independent due diligence and seek the advice of qualified advisors before making any investment decision.