It’s often said that property investment is a game of finance more than real estate. One of the key factors that determines how the growth of your property portfolio is a person's borrowing capacity.
Your borrowing capacity represents how much money you can access from a lender – and therefore the price of the property you can purchase. When determining a person's borrowing capacity, there are several things a lender will look at.
Income sources
The heart of your borrowing power is always going to be the stability of your income. It's not always just about the total amount you earn but where it comes from and how consistent it is. While a regular salary is a substantial contributor, lenders also recognise the value of additional income streams, such as part-time employment, rental income, or returns from investments. Your income is always going to be the main factor a lender looks at because it gives them comfort that you are able to earn enough income to service a loan.
Financial obligations
The debts you carry will also play a significant role in determining your borrowing power. Whether it’s credit card balances, personal loans, car loans, or other financial commitments, lenders take into account your existing obligations. Effectively, the more debts you currently have, the lower the overall cash you will have in any given month to service future debts. Equally, lenders don’t want to lend to people who already have high debts relative to their income levels, as borrowing will put them under more financial pressure.
Employment history
A stable employment history is important when it comes to assessing your borrowing power. Lenders like to see a consistent work history, as they view it as an indicator of reliability and a steady income source. Self-employed individuals may face additional scrutiny compared to a wage-earner, but if you can show a steady history of work, you will still be able to access finance from lenders. Typically, lenders like to see self-employed individuals with at least two-years of tax returns to prove that they have a steady stream of income. On the flipside, a wage-earner might only need to provide two payslips. Requirements vary from lender to lender, so a mortgage broker can guide you based on your employment status.
Interest rates and loan terms
The length of the loan and the overall interest rate you have to pay will also impact your ability to borrow. When rates rise, it means your overall level of repayments increases, reducing your borrowing capacity. Similarly, if you are looking for a loan over 20 years compared to 30, your overall repayments will be higher and that also cuts down your borrowing capacity. Mortgage brokers can help here by comparing your options and finding the most suitable loan product for your personal situation.
Your deposit
To obtain finance in the first place, lenders require a borrower to put down some of the cash for the property upfront in the form of a deposit. Oftentimes, the higher the percentage you can contribute, the lower the perceived risk and the lower the interest rate. Therefore, your borrowing capacity might be larger. There are other factors that come into play here, such as government schemes and incentives that borrowers can access. This can mean that you are able to reduce their deposit and still obtain a higher level of borrowing. These schemes are predominantly focused on helping first-home buyers enter the market and speaking to a mortgage broker about your financial situation is normally the best way to assess your eligibility.
