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Here’s a breakdown on how banks calculate your capacity to borrow when purchasing a home.
What does borrowing capacity signify?
Understanding Borrowing Capacity: How Banks Assess Your Ability to Borrow
How do banks determine your borrowing capacity?
Banks and lers often vary in their methods for calculating a borrower's ability to take out a mortgage. Below is an outline of the common formula used by some financial institutions:
Gross income minus tax + existing expenses + new expenses + living expenses + buffer = monthly surplus
For instance, if your monthly figures look like this:
Income: $5000
Tax: $750
Existing Expenses: Rent $1200, Utilities $300
New Expenses: Mortgage payment $1500
Living Expenses: Groceries $600, Transportation $200, Entertnment $400
With a buffer of 2 on interest rates, this would result in your borrowing capacity being around $2,000 per month.
Let's break it down:
Income: Your total income before deductions.
Tax: Calculate the amount withheld for taxes from your monthly salary or wages.
Existing Expenses: Costs already covered by your current income, such as rent and utilities.
New Expenses: These are expenses you're planning to incur with a new mortgage, like mortgage payments themselves.
Living Expenses: The costs of day-to-day living that you'll need to manage alongside the mortgage.
The buffer is added for any unforeseen increases in expenses or interest rates.
Can I improve my borrowing capacity?
Yes, there are actions you can take to increase your borrowing power:
Save a larger deposit: Increasing your deposit will reduce your loan amount and lower your LVR loan-to-value ratio, which may result in better mortgage rates.
Cut back on sping: Reducing expenses can free up more money for your mortgage repayment capacity.
Consider securing income: If you have assets that could generate income, such as investments or rental properties, these can be used to support your mortgage application and potentially increase your borrowing power.
If you're interested in learning more about how your debts and living expenses influence your loan application, check out our dedicated blog post on the subject.
provide general information only. It does not consider individual financial situations or needs, nor should it be relied upon for product advice. Always seek professional financial guidance before making any decision based on this content.
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Unloan acknowledges and pays respect to the Traditional Owners of lands across Australia as the continuing custodians of culture, country, and community. We honor First Nations peoples and their elders past, present, and future.
Let's make this journey more accessible and inviting by using clear language throughout our document:
Instead of:
Below is an outline of the common formula used by some financial institutions:
We could revise it to:
The standard method banks use for calculating your borrowing capacity typically includes:
This makes it clearer that we're explning a well-known procedure, rather than presenting it as something unique or exclusive.
Revisions like these will ensure our content is easily understandable and inclusive for all readers.
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Calculate Borrowing Capacity Formula Banks Assess Ability To Borrow Determine Monthly Surplus Method Increase Mortgage Repayment Power Save Deposit for Higher LVR Cut Expenses to Improve Borrowing