Maximising Your Borrowing Power on a $120,000 Salary in Australia

Understanding Borrowing Power

Borrowing power, or borrowing capacity, is the amount of money lenders are willing to lend you based on your financial situation. For someone earning $120,000 annually, several elements determine this capacity, including your income, expenses, existing debts, and the current interest rates.

Lenders typically assess your borrowing power using a combination of your net income and monthly financial commitments. They apply a buffer to ensure you can manage repayments even if interest rates rise. In Australia, this buffer is generally around 3% above the current interest rate.

Factors Affecting Borrowing Power on a $120,000 Salary

Income and Expenses

Your income is the starting point for calculating borrowing power. On a $120,000 salary, assuming no other income sources, lenders will subtract your regular expenses such as living costs, any existing loan repayments, and credit card limits to determine your disposable income.

Credit Score and History

A strong credit score can enhance your borrowing power. Lenders in Australia consider a good credit score to be above 620. A higher score not only boosts your borrowing capacity but could also secure you a lower interest rate. Be sure to check your credit report for errors and rectify them before applying for a loan.

Existing Debts

Existing debts can significantly impact your borrowing power. If you're servicing a car loan or personal loan, lenders will factor these repayments into your financial commitments. Clearing smaller debts can improve your borrowing capacity and position you more favourably with lenders.

Type of Loan

Different loan types can affect how much you can borrow. Fixed-rate loans might have different assessment criteria compared to variable-rate loans. Interest-only loans, while offering lower initial repayments, may reduce your borrowing capacity due to higher long-term costs.

Practical Tips to Maximise Borrowing Power

Reduce Unnecessary Expenditures

Review your monthly expenses and identify areas where you can cut back. Reducing subscriptions, dining out less, and managing utility bills can increase your disposable income, thereby improving your borrowing power.

Pay Down Existing Debts

Prioritising the repayment of existing debts can free up more of your income for mortgage repayments. Focus on clearing high-interest debt first, such as credit cards and personal loans.

Save for a Larger Deposit

A larger deposit reduces the loan-to-value ratio (LVR), lowering the lender's risk and potentially increasing your borrowing capacity. Aim for at least a 20% deposit to avoid Lenders Mortgage Insurance (LMI).

Common Mistakes to Avoid

Overestimating Borrowing Capacity

It's easy to assume that a higher salary equals a higher borrowing capacity, but other factors weigh heavily in this calculation. Always consider your full financial picture.

Ignoring Interest Rate Buffers

Lenders apply interest rate buffers to safeguard against future rate increases. Failing to account for these can lead to financial strain if rates rise.

How Esteb and Co Can Help

At Esteb and Co, we specialise in tailoring mortgage solutions to fit your unique circumstances. Our experienced brokers will guide you through the process, helping you understand your borrowing capacity and find the best loan products to suit your needs. We provide insights into the latest market trends and offer personalised advice to optimise your financial position.