How Much Can I Borrow?
For anyone looking to buy a property, the single biggest factor in this equation is what is known as your “Borrowing Capacity” . Put simply this is how much you can borrow.
It relates directly to your income and expenses and the surplus income you have to use towards a mortgage. Now of course there are many variables to this and this is where lender choice comes in to play as each lender has a different credit policy that determines how much of that income will be take into account.
Some areas that vary amongst lenders:
- Bonus- whether the lender will use the higher of the last two years, the lower, the average or simply the most recent.
- Commissions- whether the lender looks at the last quarter, last 6 months annualised, or last 12 months.
- Self employed- whether the lender looks at the most recent years income, an average of the two.
- Profits- Whether you can include profits if dividends haven’t been paid? If you share the company with others, can profit be used?
- One off items- How the lender treats covid payments, depreciation and so on.
The lender also overlays this figure with the loan repayments using an inbuilt buffer called the Assessment Rate. At this time of writing the buffer is 3.00% over the actual interest rate and this is really key as to why is recent months – how much you can borrow has been squeezed and reduced due to interest rates rising. As rates have gone up, so too has the rate the banks use to assess if you can afford a loan.
So while you may have a significant amount of equity, or even cash in the bank, and uplift in a property- simply having the deposit and desire to buy a property isn’t enough to get a loan.
The banks want to ensure you have the income to afford the loan. They have responsible lending guidelines that stipulate they can only lend to you if you can afford to repay the loan from income (not via the sale of an asset or from cash sitting in a bank account).
If you would like to know how much your borrowing capacity Is- reach out.