When applying for a home loan, one of the first things you want to know is how much you can borrow.
But how exactly do lenders calculate this key figure?
It’s not as simple as multiplying your income.
Lenders take a holistic view of your full financial profile.

Let’s look at the top factors that determine how much you can borrow for a property purchase.

Your Income

At its foundation, borrowing capacity is tied to your basic earning power and ability to make ongoing payments. Lenders want to see consistent and stable employment and income, preferring salaried roles with a long-term employer versus independent contractor roles. Any bonuses, commissions, or overtime are viewed cautiously since they can fluctuate. Income streams from investments, rentals, and side businesses are included but often discounted by at least 20% for the risk of fluctuation. If you are self-employed, the same consistency is required to be demonstrated most commonly by your financial documents of the past 2 years.

Fixed Monthly Expenses

Lenders will estimate your baseline cost of living, including items like housing costs, debt payments, childcare, groceries, transportation, healthcare insurance, utilities, phone service, clothing and other regular expenses. The lower your demonstrated expenses, the more borrowing power remains for mortgage payments. Be thorough yet conservative when documenting your expenses. Underestimating will come back to haunt you when loan amounts fall short. Track detailed spending for several months through bank and credit card statements to quantify your fixed costs. Keeping expenses low and manageable can help with increasing borrowing capacity.

Outstanding Debts & Liabilities

Your current debts directly reduce the amount you can borrow. Be upfront about all credit cards, personal loans, auto loans, student loans, and other financial obligations that appear on your credit file and financial statements. Even if you plan to pay debts off prior to home purchase, lenders will assess your regular recurring payments at the time of application.

Credit History & Scores

Your credit report offers important behavioural insight into how responsibly you manage debts, payments and obligations over time. Lenders prefer minimum credit scores above 700. Excellent scores (750+) are helpful as they can qualify you for the largest loans and lowest rates. Sub-650 scores usually will require special approval as they signal potential issues. Be sure to check your score several months before applying so there’s time to take corrective action if needed.

The Property Itself

The amount lenders are willing to provide is tied directly to the value and attributes of the property itself. The lender approved valuation amount sets the upper ceiling, not your contract price. Most lenders can fund up to 80-95% of that valuation. Location and condition factor in as well. Be realistic when setting your price range to align with actual market value.

At Investors Mortgage, we will help you put your best foot forward by optimising these key factors that determine your maximum borrowing ability. Our team can guide you each step of the way to loan pre-approval and beyond.

Contact us today to discuss.

Spread the Word