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How Banks Calculate Your Borrowing Power When Buying a Home
Borrowing power represents the estimated amount of money that lers are willing to ext for a mortgage, with the m of helping you understand what price range might suit your needs. Even though some borrowers prefer to secure pre-approval from their ler before beginning their property search, having an understanding of what you can afford is often sufficient at this early stage.
Banks use various factors when determining your borrowing capacity. A common formula for calculating it includes:
Gross income - Taxes - Existing expenses - New expenses - Living expenses - Buffer = Borrowing power
Let's break down each component:
Gross Income: This refers to the total amount of money you earn before deductions, including any bonuses or allowances.
Taxes: Typically include income tax and may also encompass other financial obligations like property taxes.
Existing Expenses:
Debts: Include monthly payments for existing loans like car loans or personal loans.
Service Costs: Such as utility bills, internet, mobile phone, insurance premiums, etc.
New Expenses:
Mortgage Payments: Calculate this based on the proposed loan amount and interest rate.
Additional Fees: These might include application fees, legal costs, and ler's mortgage insurance if required.
Living Expenses: This encompasses all household expenses like groceries, utilities, transportation, clothing, healthcare, entertnment, education, etc.
Buffer: A conservative addition made to account for potential interest rate hikes or unexpected future financial needs.
Increasing Your Borrowing Power
There are several strategies you can employ to increase your borrowing power:
Save for a Larger Deposit: The more deposit you save, the lower your LVR will be and thus, the better mortgage rates you may receive.
Reduce Existing Debts: Paying down existing debts could potentially qualify you for higher loan amounts by lowering your debt-to-income ratio.
Boost Your Credit Score: A high credit score indicates to lers that you're reliable in managing finances, which can positively influence your borrowing power.
Increase Your Income: This might involve taking on a second job or seeking promotions at work.
Understanding How Your LVR Influences Your Borrowing Power
The Loan-to-Value Ratio LVR is a crucial factor lers consider when assessing your application. Typically, the higher your deposit compared to the property's value, the lower the interest rates you can secure. For instance:
Below 80: No LMI required.
80 and above: You may need to pay LMI.
that while these steps can help increase your borrowing power, each bank has its own specific eligibility criteria based on various factors including your employment status, income, credit history, and other financial obligations. Always seek professional advice before making decisions about securing a mortgage.
Important Note: The information provided is for general guidance only. It does not constitute financial or legal advice. For personalized advice tlored to your situation, consult with a qualified financial advisor or mortgage broker.
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Calculate Borrowing Power for Home Buying Factors Banks Use in Approval Process Gross Income and Debt Assessment LVR and Interest Rate Influence Strategies to Increase Borrowing Capacity Importance of Credit Score in Mortgage