Understanding Borrowing Power Guide

If you've ever thought about buying a home or making a big purchase, you might have come across the term "borrowing power."

But what exactly does it mean, and how does it affect your financial decisions?

In this guide, we'll dive into the world of borrowing power and explore the key factors that can help you estimate how much you can borrow.

Let's empower you with the knowledge to make confident borrowing choices!

What is Borrowing Power?

Imagine you're planning to buy a car, go on a dream vacation, or even purchase a house. Chances are, you might need to borrow money from a bank or a lender.

Borrowing power refers to the maximum amount of money a lender is willing to lend you based on your financial circumstances. Your borrowing power is influenced by various factors, and understanding them can give you a clearer picture of what you can afford.

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Estimating Borrowing Power

Lenders use special formulas and calculations to figure out how much money they can safely lend you. One common method they use is called the Debt-to-Income Ratio (DTI).

This ratio compares your monthly debt payments (like credit card bills, existing loans, etc.) to your monthly income. The lower your DTI, the more confident a lender might feel about lending you money.

Tip: You can actually estimate your borrowing power using online tools like the Borrowing Power Calculator, which can give you a rough idea of how much you might be able to borrow based on your income and expenses.

10 Factors Affecting Borrowing Power

Several factors play a role in determining your borrowing power. Let's break down each one to understand its impact:

1. Income: The more money you earn, the higher your borrowing power.
2. Expenses: High living expenses can reduce your borrowing power, as lenders want to ensure you can comfortably repay the loan.
3. Credit History: A good credit history shows lenders that you're responsible with money, boosting your borrowing power.
4. Existing Debts: The more debts you already have, the lower your borrowing power might be.
5. Loan Term: A longer loan term might increase your borrowing power, but remember, longer terms can mean paying more in interest.
6. Interest Rates: Lower interest rates can increase your borrowing power by reducing the amount you need to repay.
7. Loan Type: Different types of loans might have different impacts on your borrowing power.
8. Employment Stability: Lenders prefer borrowers with stable jobs, as it increases the likelihood of repayment.
9. Deposit: A larger deposit means you need to borrow less, which can positively influence your borrowing power.
10. Financial Commitments: Other financial obligations, like child support, can affect your borrowing power.

10 Tips to Improve Borrowing Power

If you want to enhance your borrowing power, here are some actionable tips:

1. Reduce Existing Debts: Pay off as much debt as you can before applying for a new loan.
2. Enhance Credit Score: Make payments on time and manage your credit responsibly to improve your credit score.
3. Increase Income: Explore ways to boost your income, like taking on a part-time job or freelancing.
4. Minimize Living Expenses: Cut unnecessary expenses to lower your DTI ratio.
5. Save for a Larger Deposit: A bigger deposit means borrowing less,
6. Consider Guarantor Support: Having a guarantor with good credit history could help with your borrowing power.
7. Clear Outstanding Tax Liabilities: Settle any outstanding taxes to improve your financial standing.
8. Choose a Suitable Loan Term: Pick a loan term that fits your budget and goals.
9. Correctly Structure Loans: Seek advice on how to structure loans for maximum benefit.
10. Improve Employment Stability: While it's not instant, having a stable job history can boost your borrowing power over time.

Understanding borrowing power is a crucial step in making informed financial decisions. By considering these factors and following these tips, you can increase your borrowing confidence and work towards achieving your financial goals. Remember, the more you know, the better equipped you are to navigate the world of borrowing!

Got Questions? We’re Here to Help

Whether you're actively looking to increase your borrowing power or are simply laying the ground work for the next big purchase in your life, our expert lenders offer a wealth of knowledge at your disposal. Simply make a home loan enquiry online with us today, and your local lender will be in touch for a chat.

What's more, our range of lending calculators below are available to help you get a clearer picture of your finances.