Buying a home is one of the biggest financial decisions you’ll ever make, and for many people, this means taking out a home loan. Whether or not you can access the loan amount you need will depend on various factors such as income, credit score, debt-to-income ratio, current savings and how much risk lenders are willing to take on. It can all feel overwhelming at first - but don't worry! In this blog, Turnkey Finance will explore each of these factors in detail so that you have all the information necessary to confidently apply for your home loan.

‍

A home loan, also known as a mortgage, is a type of long-term loan that helps you finance the purchase of your home. It’s secured by the property itself, meaning it must be paid back within the loan term agreed or if you sell the home. A home loan typically involves two parties: the lender and the borrower. By providing funds to purchase a house, lenders are assuming risk in case borrowers don't make their payments on time or default on their loans.

‍

Home loans have variable or fixed interest rates, with repayment terms that can range from 1 to 30 years. Homeowners pay off the principal plus interest over time until the entire debt is repaid. Some homeowners may choose to pay off their mortgages faster than expected with refinancing or by making extra payments.

‍

Home loans may also come with additional costs like settlement fees and lenders mortgage insurance, so it's important to do your research before committing to a loan. Ultimately, home loans offer an opportunity for people to purchase a home without having the entire amount of money upfront, making homeownership much more accessible. 

How borrowing capacity is determined for a Home Loan

Borrowing capacity is a key factor in determining what kind of home loan you would be eligible for. There are many elements that go into calculating your borrowing power, including your income and expenses, value of the property, any existing debts and assets, as well as credit history and repayment track record.

‍

Your current financial obligations will play an important role in helping lenders determine how much they can lend you. These could include any outstanding loans or credit cards, such as car loans or HECS/HELP debt loans. Lenders will also assess your living costs to ensure you have enough left over after paying off the loan each month.

‍

How income is considered in determining borrowing capacity

When it comes to determining your borrowing capacity, your income is one of the most important factors that lenders consider. Here are some ways in which income is considered in determining borrowing capacity:

‍

1. Gross income: Your gross income is the amount you earn before taxes and other deductions are taken out. Lenders will typically use your gross income to determine your borrowing capacity, as it gives them an idea of how much money you have coming in each month.
2. ‍Other sources of income: Lenders may also consider other sources of income, such as overtime, bonus payments, rental or investment income when determining your borrowing capacity. However, these sources of income are typically less reliable than regular income and may not be given as much weight.
3. ‍Debt-to-income ratio: Finally, lenders will look at your debt-to-income ratio, which is the amount of debt you have relative to your income. If your debt-to-income ratio is too high, lenders may be hesitant to lend you money, as it suggests that you may have difficulty repaying your debts.
   

‍

Tips for maximising your income for a Home Loan

‍

When determining borrowing capacity for a home loan, income is a critical factor that lenders consider. Here are some tips for maximising your income and increasing your borrowing capacity:

‍

1. Declare all of your income: Make sure to declare all of your income on your loan application. This includes your salary, bonuses, overtime, rental income, investment income, and any other sources of income. Lenders typically require proof of income, such as pay slips or tax returns, so make sure to keep these documents up to date.

‍

2. Reduce your debts: Lenders also consider your debt-to-income ratio, which is the amount of debt you have compared to your income. To improve your borrowing capacity, you may be required to pay off your debts or even consolidating your debts into one loan.

‍

3. Improve your credit score: Your credit score is a critical factor in determining your borrowing capacity. To improve your credit score, make sure to pay your bills on time, reduce your credit card balances, and avoid applying for new credit.

‍

How expenses are considered in determining borrowing capacity

Lenders must take into account other expenses that could affect how much a borrower can qualify for in terms of lending: these include insurance premiums, entertainment, utility bills, taxes, home maintenance costs, and other monthly expenses. Additionally, lenders may also look at any existing debts that the borrower may have such as car loans or credit card payments. All of these factors will be taken into account to determine if a borrower can afford to take on a loan and how much they can borrow.

‍

Understanding one's borrowing capacity is essential for any potential borrower. Knowing what you can realistically borrow helps to ensure that you are not taking on too large of a loan and allows you to create a plan of action so that you can meet your financial goals without putting yourself in debt. If you need more information about how expenses are considered when determining borrowing capacity, it is important to speak with an experienced Mortgage Broker who can provide further guidance and advice.

‍

How a credit score is considered in determining borrowing capacity

Your credit score is one of the most important factors lenders consider when determining how much you can borrow. A higher credit score means that you are more likely to be approved for larger amounts of money and lower interest rates on loans. Credit scores range from 300-850, with a "good" score generally considered to be between 700-749, and an "excellent" score being 750 or above.

‍

The amount of debt you have will play a major role in determining your credit score as well - having too much debt relative to your income could negatively impact your score and make borrowing more difficult. Additionally, lenders may look at other factors such as employment history and any bankruptcies or defaults on your record to assess risk and determine your borrowing capacity.

‍

It is important to make sure that you are keeping track of your credit score, as it has a major impact on the amount of money you can borrow. There are a variety of ways to monitor your credit score, such as using online monitoring services or requesting a report from one of the three major credit bureaus (e.g. Equifax). Knowing and understanding your credit score can be the key to getting approved for loans and unlocking greater financial opportunities.

‍

Best business financial services

Turnkey Finance is proud to be the recipient of the 2022 Australian Mortgage Award for Young Gun of the Year. We are honoured to have been recognised for our commitment to providing quality services and advice tailored to our client's needs.

At Turnkey Finance, we understand that everyone’s financial situation is unique, which is why we strive to provide personalised solutions. Our team offers a range of services including personal finance, business finance, financial planning, and accounting. With decades of experience in banking and finance and an extensive network across Australia, Turnkey Finance has you covered!

‍

If you're looking for advice on anything from setting up a budget to finding the right loan product – look no further than Turnkey Finance. Our knowledgeable and friendly team will work closely with you to ensure you get the financial solutions that best suit your needs!

‍