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How Much Can I Borrow

How Much Can I borrow

Have you noticed if you go and do a search on the internet on “How Much Can I Borrow” all you get is a mass of lenders throwing their calculators at you without explaining what is behind the calculations?

We believe this should not be some hidden lender secret and borrowers should know in advance what aspects of their financial and personal lives will impact the final decision.

So let us here explain in a bit more detail what’s actually behind the calculations that determine how much you can borrow, comfortably.

What do lenders look at when determining how much a borrower can afford

Lenders primarily look at the following areas when determine the maximum loan of any borrower, including businesses.

Income:

The following components of a borrower’s income is considered carefully by lenders;

  • The amount of income – the overall amount and any growth in that income over the past 2 years and likely continuance of that income level
  • The percentage of base salary – this is the most consistent part of a borrower’s income and is usually accepted at 100%
  • Allowances – if allowances can be seen to be an official part of the income package and have been paid consistently for a reasonable period most lenders will accept at 100%. If not many lenders will not accept any allowances as income at all.
  • Commissions – Lenders look at the consistency of regular ongoing payments of commission, some requiring consistent levels of payment for minimum period of 2 years before they accept 100% as income
  • Bonuses – same as Commissions. Lenders look at the consistency of regular ongoing bonuses with payments over 2 years required before 100% acceptance as income
  • Government payments – while family allowance is generally accepted by most lenders, it is often only accepted for pre-teen. Some lenders will accept some government payments, other will not. Policies are very diverse in this area of income acceptance.

Expenditure:

Lenders will compare a borrower’s expenditure budget to the minimum living costs they ascertain for such a family entity (single, couple, dependents) and peruse the bank statements looking for expenses that may not have been identified in the borrower’s budget.

Lenders have their own minimum living expenses tables for the type of family unit matching the income level and will; use the3ir own living costs estimate should they believe the borrower has underestimated their living expenses.

Employment

Lenders study the employment history of a borrower to determine the likely stability of the income to service the loan.

The more stable the employment the higher score for the borrower. If employment history is unstable or patchy, and the industry in which the borrower works is experiencing difficulty, this may way against the final decision of the loan.

Credit History:

All lenders do a comprehensive check on borrower’s credit history at the time of the lodgment of any loan application. This is in fact one of the very first tasks undertaken in them loan assessment.

The credit history report will prove ample evidence to any lender of the suitability of the borrower as it details previous credit enquiries, existing loans and credit or store cards and any loan or other payment defaults.

A listing of a default in repayments on the credit check will usually result in an immediate decline.

Security:

Lenders will assess the value of the security being offered and determine if it is satisfactory for their policies.

When it comes to property security, things lenders look for include the location of the property (Postcode, CBD, metro, Rural) the property type (home unit Apartment), the type (low density, high density) and its age and presentation.

Property valuations for lenders are most often undertaken by private valuer groups who specialise in such valuations.  

Assets & Liabilities:

Lenders will look at the overall assets and liabilities of the borrower and then determine if that is reasonable and consistent with applicants of similar age bracket.

A high debt to asset ratio for younger borrowers may not be an issue for lenders as that’s the normal situation. However, that same high debt to asset ratio for more aged borrowers may be a concern for a lender without a reasonable excuse for such a financial situation.

For a high level estimate of your borrowing capacity please use our How Much Can I Borrow Calculator.

For more detailed analysis of how much can you afford, contact us.

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