How Much Can I Borrow?

This is a common question we are often asked; in fact this is a large part of what we do for our clients. We estimate their borrowing capacity prior to approaching a lender on their behalf to try and assess the probability of achieving an approval for the required loan amount.

The way we do this is by becoming familiar with your personal circumstances, working through your income documents, understanding your assets & liabilities position as well as reviewing your bank statements so that we can gain a better understanding of your average monthly living expenses. We then take this information and complete a few calculations with our own borrowing capacity calculator as well as lender calculators also, so that we can form an opinion on what we feel is a sustainable maximum loan amount, one that we feel would achieve your goals (without placing you into hardship) but also result in an approval from a lender.

There are several borrowing capacity calculators online, including on our website. These generic calculators might help you in providing some context as to how much you may be able to potentially borrow. However, it is important to note that you should not rely on these calculators solely when making financial decisions as they often do not have the required sensitivities built into their back-end like lender calculators do.

For example, a common mistake people make when using generic online borrowing capacity calculators is that they only input the actual interest rate that they may be paying where lenders are required to add 3% above the actual rate or utilise an interest rate floor (generally about 5.50% pa) whichever is higher. Lenders will also utilise the Household Expenditure Measure (HEM), which is based on Australian Bureau of Statistics data where they feel that your declared living expenses are lower than HEM.

What Can I Do to Maximise My Borrowing Capacity?

There are a few things you can do to maximise your borrowing capacity assuming that making more income is not possible:

  • If you have too many credit cards or a very high limit that you are not utilising, consider cancelling those cards or reducing your overall limits, as lenders will take into account the full limit despite it not being used because the theory is that you can use it. To put it into context, lenders will generally assume that you are required to pay 3.80% of your total credit card limit per month so if you have a $20,000 credit card limit that you are not using, it is taking approximately $760 per month away from your potential borrowing capacity ($20,000 x 3.80%)!
  • By Now Pay Later limits sometimes stick around even after you’ve paid them off, they act like a Line of Credit and are treated similarly to credit cards. So again, cancel them if they are no longer required as they may be hindering your borrowing capacity.
  • When you are seeking to borrow a large sum of money, it is only prudent that you review your spending habits. Our suggestion is that you start adjusting your spending habits several months before you plan on taking out a loan, so that you give yourself an opportunity to see what it will be like to live on a reduced budget as your adjustments need to be sustainable.
  • If you are self-employed, some lenders will now consider your salary assuming you are paying yourself a regular salary ‘on the books’. However, if that is not enough to achieve the loan amount you require, ensure that your financials and tax returns are up to date, as there may be retained profits and/or addbacks that we may be able to utilise in order to strengthen your borrowing capacity.

If you need help in estimating how much you can borrow, please feel free to use this calculator (as well as the others on our website) but note that you should not act on your own calculations alone without first discussing your specific circumstances with us, as these tools are just for general information only.

You should also note, that most online borrowing power calculators do not cater for business, commercial and/or Self-Managed Superannuation Fund (SMSF) lending, you will need to find specific calculators that cater for these types of borrowing arrangements. Or just contact us and we’ll do that for you, because often the borrowing capacity methodology for businesses, commercial and SMSF loans may be quite different and often centre around financial ratios as well as income less expenses with various sensitivities. Read about working capital ratios here.

If you feel that you would be better off with our help in analysing your specific circumstances and us estimating your borrowing capacity on your behalf, contact us now and we’d be happy to work it out for you. Especially if your circumstances or borrowing structure is more complex such as if you are self-employed, are borrowing for business, have several trusts with income flow between the same or if borrowing in an SMSF.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.