# What Really Affects Your Borrowing Power? Understanding the Factors Lenders Consider

When you start thinking about buying a home, one of the first questions that comes to mind is usually, “How much can I borrow?” It is a reasonable question, and most people assume their income is the main factor that determines the answer. While your salary certainly plays a significant role, lenders take a much more comprehensive view of your financial situation before deciding how much they are willing to lend you.

Understanding what affects your borrowing capacity before you start house hunting can save you time, stress, and potential disappointment. Let us explore the key factors that lenders assess when calculating how much you may be able to borrow.

## Your Income Is Just the Starting Point

Yes, your income matters. Lenders want to see evidence of stable, reliable earnings that demonstrate your ability to meet ongoing repayments. However, the type of income you earn and how consistently you receive it can influence how lenders assess your application.

For employees, lenders typically look at your base salary, regular overtime, bonuses, and any allowances. For self-employed borrowers, the assessment process often involves reviewing business financials over a longer period to establish an average income figure.

It is worth noting that not all income is treated equally. Some lenders may only consider a portion of certain income types, such as bonuses or commission, when calculating your borrowing power. This is where working with a mortgage broker can be particularly valuable, as different lenders have different policies around income assessment.

## Existing Debts and Credit Commitments

Here is where many prospective borrowers get caught off guard. Your existing debts have a substantial impact on how much you can borrow for a home loan. Lenders assess your debt-to-income ratio to understand your overall financial commitments and ensure you can comfortably manage additional borrowing.

This includes car loans, personal loans, HECS-HELP debts, buy now pay later accounts, and yes, credit cards. Even if you pay your credit card balance in full each month, lenders often assess the full credit limit as a potential liability. That old credit card sitting in your drawer with a high limit that you never use? It could be reducing your borrowing capacity right now.

Before applying for a home loan, it may be worth reviewing your credit facilities and considering whether you need all of them. Reducing limits on unused credit cards or closing accounts you no longer need could potentially improve your borrowing position.

## Living Expenses and the Household Expenditure Measure

Lenders are required to conduct responsible lending assessments, which means they need to verify that you can afford loan repayments while still meeting your living expenses. This involves examining your actual spending habits alongside industry benchmarks.

Your bank statements and transaction history will typically be reviewed to understand where your money goes each month. Categories like groceries, utilities, insurance, subscriptions, childcare, and discretionary spending all come under scrutiny.

If your spending appears high relative to your income, this may affect how much a lender is willing to offer. Being mindful of your spending patterns in the months leading up to a loan application can be helpful.

## Your Credit History Tells a Story

Your credit report provides lenders with a snapshot of your financial behaviour over time. It shows your history of managing credit, including any late payments, defaults, or credit enquiries.

A strong credit history demonstrates reliability and can support your loan application. Conversely, issues on your credit file may limit your options or affect the terms available to you.

It is a good idea to check your credit report before applying for a home loan. This allows you to identify any errors or issues that might need addressing. You can access your credit report for free through the major credit reporting agencies in Australia.

## Why Speaking to a Broker First Makes Sense

Navigating the factors that affect borrowing power can feel overwhelming, especially when you are eager to start your property search. This is where a mortgage broker can provide real value.

A broker can review your financial situation, help you understand where you currently stand, and identify any areas that might benefit from attention before you apply. They can also compare options across a range of lenders to find products that may suit your circumstances.

Rather than falling in love with a property only to discover it is beyond your reach, getting clarity on your borrowing capacity upfront puts you in a stronger position.

## Take the First Step

Understanding your borrowing power is an essential part of your home buying journey. If you are considering purchasing a property and want to know where you stand, we invite you to get in touch with the team at The Loans Suite. We can help you understand your options and guide you through the process with clarity and confidence.

*This information is general in nature and does not constitute financial advice. Your personal circumstances should be considered before making any financial decisions.*