Avoid These Borrowing Capacity Mistakes When Applying

Understanding your borrowing capacity is one of the most important steps when applying for a home loan. Your borrowing capacity determines how much you can borrow from banks and lenders, directly impacting your ability to purchase the home you want in Joondalup's property market.

What Is Borrowing Capacity?

Borrowing capacity refers to the maximum loan amount that lenders will approve based on your financial situation. This calculation considers multiple factors including your income, expenses, existing debts, and the loan to value ratio (LVR) of the property you're purchasing.

Lenders assess your capacity to service a home loan by examining your ability to make regular repayments while maintaining your current lifestyle. This assessment helps protect both you and the lender from financial stress.

Key Factors That Affect Your Borrowing Capacity

Several elements influence how much you can borrow:

• Income stability: Regular employment and consistent income streams increase your borrowing power
• Monthly expenses: All recurring costs including utilities, groceries, and entertainment reduce available borrowing capacity
• Existing debts: Credit cards, personal loans, and other commitments impact your serviceability
• Interest rate: Higher home loan interest rates reduce the amount you can borrow
• Loan term: Longer loan periods may increase borrowing capacity but result in higher total interest costs

The Role of Loan to Value Ratio (LVR)

The loan to value ratio represents the percentage of the property's value that you're borrowing. Most lenders offer their most favourable interest rate discounts to borrowers with an LVR of 80% or below.

When your LVR exceeds 80%, you'll typically need to pay lenders mortgage insurance (LMI). This additional cost protects the lender if you default on your loan but increases your overall borrowing costs.

Preparing Your Home Loan Application

A well-prepared Home Loan application can significantly improve your borrowing capacity assessment. Lenders require comprehensive documentation to evaluate your financial position:

• Recent payslips and employment contracts
• Tax returns and notices of assessment
• Bank statements showing savings history and spending patterns
• Details of existing debts and credit commitments
• Property information including purchase contracts

Maintaining organised financial records demonstrates your reliability to lenders and can support a streamlined application process.

Fixed vs Variable Interest Rate Impact

Your choice between fixed interest rate home loans and variable home loan rates affects your borrowing capacity calculation. Lenders typically assess variable rate loans using a higher buffer rate, which may reduce your maximum borrowing amount.

Fixed interest rate options provide certainty for calculating home loan repayments, making budgeting more predictable. However, variable interest rates may offer flexibility and potential savings when rates decrease.

Maximising Your Borrowing Potential

Several strategies can help improve your borrowing capacity:

1. Reduce existing debts: Pay down credit cards and personal loans before applying
2. Increase your deposit: A larger deposit reduces your LVR and may eliminate LMI requirements
3. Consider an offset account: This feature can reduce interest costs and improve your overall financial position
4. Explore different Home Loan options: Access Home Loan options from banks and lenders across Australia to find suitable products
5. Maintain steady employment: Job stability strengthens your application

The Value of Home Loan Pre-approval

Securing Home Loan pre-approval provides clarity on your borrowing capacity before you start property hunting. This process involves a preliminary assessment of your financial situation, giving you confidence when making offers.

Getting pre-approved also demonstrates to real estate agents and vendors that you're a serious buyer with confirmed financing capacity. This advantage can be particularly valuable in Joondalup's active property market.

Additional Costs to Consider

When calculating your borrowing capacity, remember to account for additional costs beyond the loan amount:

• Stamp duty (varies by state and property value)
• Legal and conveyancing fees
• Building and pest inspections
• Home insurance premiums
• Moving and connection costs

These expenses don't typically form part of your home loan but require separate funding, affecting your overall financial capacity.

Working with Professional Mortgage Brokers

Professional mortgage brokers can help you understand your borrowing capacity and identify suitable Home Loan options. At Luxe Finance Group, we work with multiple lenders to find products that match your financial circumstances and property goals.

Our expertise in the application process helps ensure your documentation is complete and presented effectively to lenders. This professional approach can improve your chances of approval and potentially increase your borrowing capacity.

Understanding your borrowing capacity is fundamental to successful home ownership. By preparing thoroughly and working with experienced professionals, you can optimise your loan application and secure appropriate financing for your Joondalup property purchase.

Call one of our team or book an appointment at a time that works for you to discuss your borrowing capacity and explore your Home Loan options.