The smartest way to understand your borrowing capacity

What Is Borrowing Capacity?

Your borrowing capacity represents the maximum loan amount that lenders are willing to approve based on your financial situation. This calculation considers your income, expenses, debts, and other financial commitments to determine how much you can realistically afford to borrow when applying for a home loan.

For Sunbury residents looking at buying a home, understanding your borrowing capacity helps you set realistic expectations and focus your property search within your means. Rather than falling in love with properties beyond your reach, knowing your limits allows you to make informed decisions.

Key Factors That Affect Your Borrowing Capacity

Lenders assess several aspects of your financial profile when calculating your borrowing capacity:

1. Income and Employment History

   • Your regular salary or wages
   • Length of employment with current employer
   • Consistency of income over time
   • Additional income sources like rental properties or investments

2. Monthly Expenses and Living Costs

   • Essential expenses such as groceries, utilities, and transport
   • Discretionary spending on entertainment and dining
   • Insurance premiums and medical expenses
   • Childcare and education costs

3. Existing Debts and Financial Commitments

   • Credit card limits and outstanding balances
   • Personal loan repayments
   • Car loan obligations
   • Other mortgage commitments

How Loan to Value Ratio (LVR) Impacts Your Application

The loan to value ratio (LVR) compares your loan amount to the property's value. Most lenders prefer an LVR of 80% or below, meaning you contribute at least 20% as a deposit. If your LVR exceeds 80%, you'll typically need to pay lenders mortgage insurance (LMI), which protects the lender if you default on payments.

For example, on a $500,000 property in Sunbury:

• 80% LVR = $400,000 loan with $100,000 deposit (no LMI required)
• 90% LVR = $450,000 loan with $50,000 deposit (LMI applies)

Building substantial home equity through a larger deposit can improve your borrowing capacity and provide access to better interest rate discounts.

Interest Rates and Repayment Calculations

When calculating home loan repayments, lenders consider both current interest rates and potential rate increases. They typically assess your ability to service the loan at rates higher than the advertised home loan interest rate.

Fixed vs Variable Interest Rates:

• Fixed interest rate home loan: Provides certainty with locked rates for a specific period, making budgeting more predictable
• Variable home loan rates: Can fluctuate with market conditions, potentially offering lower rates but with less certainty

Many Sunbury buyers choose split loans, combining both fixed and variable portions to balance stability with flexibility.

Additional Costs That Affect Your Budget

Beyond the loan amount, factor these costs into your borrowing calculations:

• Stamp duty: Varies based on property value and buyer status
• Legal and conveyancing fees: Typically $1,500-$3,000
• Building and pest inspections: Around $500-$800
• Ongoing costs: Council rates, insurance, and maintenance

These expenses reduce the amount available for your deposit, potentially affecting your final borrowing capacity.

Maximising Your Borrowing Potential

To strengthen your home loan application, consider these strategies:

1. Reduce existing debt: Pay down credit cards and personal loans before applying
2. Improve your credit score: Ensure all payments are made on time
3. Stabilise your employment: Avoid changing jobs during the application process
4. Gather comprehensive documentation: Prepare recent bank statements and income records
5. Consider an offset account: This feature can reduce interest payments over time

The Application Process and Pre-Approval

Getting home loan pre-approval provides clarity on your borrowing capacity before you start house hunting. This streamlined application process involves submitting financial documentation to lenders who then provide conditional approval for a specific loan amount.

Pre-approval offers several advantages:

• Confidence when making offers on properties
• Faster settlement once you find your ideal home
• Clear understanding of your budget parameters
• Stronger negotiating position with vendors

Step Ahead Finance can help you access home loan options from banks and lenders across Australia, comparing interest rates and loan features to find suitable products for your situation.

Making Informed Decisions in Sunbury's Property Market

The local property market influences your borrowing decisions. Understanding current trends, median prices, and future growth prospects helps you make informed choices about loan amounts and property types.

Working with experienced mortgage brokers provides access to multiple lenders and loan products, ensuring you understand all available home loan options. Professional guidance can help identify suitable interest rates, loan features, and repayment structures that align with your financial goals.

Remember that borrowing capacity calculations are just the starting point. Consider your lifestyle goals, future financial plans, and comfort level with debt when determining how much to actually borrow.

Call one of our team or book an appointment at a time that works for you to discuss your borrowing capacity and explore suitable home loan options for your Sunbury property purchase.