Why is My Borrowing Power Low? Understanding Factors and Solutions

What is Borrowing Power?

Borrowing power, or borrowing capacity, refers to the maximum amount a lender is willing to lend you for a home loan. This figure is determined by several factors, including your income, expenses, credit history, and the current lending environment. Understanding your borrowing power is crucial as it sets the framework for your property search and financial planning.

Factors Affecting Your Borrowing Power

Income and Employment Stability

Lenders assess your income to determine how much you can afford to borrow. A stable, high income generally increases your borrowing capacity. However, if you’re self-employed or have fluctuating earnings, lenders might be more conservative. They typically require at least two years of consistent income evidence for self-employed individuals.

Existing Debts and Liabilities

Your current debts significantly impact your borrowing power. High credit card limits, personal loans, or car loans reduce the amount you can borrow for a mortgage. Lenders calculate your debt-to-income ratio to assess your financial health, ensuring you aren't over-leveraged.

Living Expenses

Lenders scrutinise your regular living expenses to ensure you can manage mortgage repayments without financial strain. They take into account costs such as groceries, utilities, entertainment, and other personal expenses. Keeping these in check can positively influence your borrowing capacity.

Credit Score

A strong credit score can enhance your borrowing power by showcasing your reliability as a borrower. In Australia, a score above 620 is generally considered good, but higher scores can unlock better loan terms and conditions.

Interest Rates and Lending Policies

Interest rates directly affect your borrowing power. Higher rates lead to higher repayments, thus reducing your capacity. Additionally, lending policies can vary between institutions, so it's crucial to shop around or consult with a broker like Esteb and Co to compare options.

Practical Tips to Increase Borrowing Power

Reduce Unnecessary Debts

Before applying for a mortgage, aim to pay down existing debts. This not only improves your debt-to-income ratio but also enhances your credit score.

Improve Your Credit Score

Regularly check your credit report for errors and take steps to improve your score, such as paying bills on time and reducing credit card balances.

Increase Your Income

Consider ways to boost your income, such as seeking a raise, taking on additional work, or exploring side hustles. A higher income can significantly increase your borrowing capacity.

Minimise Living Expenses

Create a budget to track and reduce your living expenses. Lenders will appreciate your ability to manage finances effectively, potentially increasing your borrowing power.

Consult With a Mortgage Broker

A mortgage broker like Esteb and Co can provide tailored advice and help you navigate the complexities of various lending products, ensuring you find the best fit for your circumstances.

Common Mistakes to Avoid

Ignoring Lender Variability

Not all lenders are the same. Failing to shop around or relying solely on your primary bank could mean missing out on better offers.

Overlooking the Impact of Credit Limits

Even if you don’t use your full credit card limit, lenders consider it a potential debt. Reducing your credit limits can improve your borrowing capacity.

Underestimating Living Expenses

Providing inaccurate living expense figures can backfire, as lenders conduct thorough checks. Always be realistic and honest in your estimates.

How Esteb and Co Can Help

At Esteb and Co, we understand the intricacies of the Australian mortgage market. Our experienced brokers offer personalised advice to help you maximise your borrowing power. We compare a wide range of lenders and products, ensuring you secure the best possible deal tailored to your financial situation. With our guidance, you can confidently navigate the home buying process.