Buying your first home is an exciting milestone, but navigating the financial aspects can feel overwhelming. One of the most important concepts to understand as a first-home buyer is borrowing power, which is the amount a lender is willing to lend you based on your financial situation.
By knowing how borrowing power is calculated and what impacts it, you can take steps to improve your financial position and unlock greater opportunities when it comes to purchasing your dream home.
This guide will help you understand borrowing power, outline the factors that influence it, and share actionable tips to help you maximise it. Plus, we’ll explain how Horizon Bank’s local experts can make the process smoother, simpler, and more rewarding.
What is Borrowing Power?
Borrowing power refers to the maximum amount of money a lender is willing to lend you for a home loan. It’s influenced by a range of financial factors, including your income, expenses, credit history, and the size of your deposit.
How is Borrowing Power Calculated?
Lenders assess borrowing power by closely examining your financial situation. This includes looking at:
● Your Income - How much you earn from your job or other sources.
● Your Expenses - Your living costs, from rent to groceries.
● Existing Debts - Any current repayments, like credit cards or personal loans.
● Credit History - How well you’ve managed past debt.
● Deposit Size - A larger deposit can enhance your borrowing capacity.
For instance, a higher annual income combined with lower monthly expenses signals to lenders that you’re in a strong position to repay your loan.
Why Does Borrowing Power Matter for First Home Buyers?
Borrowing power determines the maximum amount you can borrow, which directly affects the types and price range of properties you can consider. Knowing this number early in your home-buying journey helps you set realistic expectations, refine your budget, and focus on homes within your financial reach.
Factors That Influence Borrowing Power
Understanding the main factors that impact borrowing power can help you identify areas where adjustments could lead to improved loan eligibility.
1. Your Income
A stable, higher income means you’ll likely have more borrowing capacity. Lenders prefer borrowers with predictable pay, such as salaried professionals or those with steady income from other sources.
2. Your Expenses
The more you spend on non-essential items, the less money you’ll have left over for loan repayments. Lenders will carefully review your spending habits, so reducing discretionary costs can boost your profile.
3. Existing Debts
Credit cards, car loans, or other debts reduce the amount you can borrow. Lenders see this as a liability when calculating your borrowing power, so reducing or eliminating debt is ideal.
4. Your Credit Score
A strong credit history shows lenders that you’re reliable when it comes to repayments. Conversely, late payments or defaults can limit your borrowing capacity.
5. Deposit Size
The bigger your deposit, the less you’ll need to borrow. A 20% deposit is often a key threshold, as it can eliminate the need for Lenders Mortgage Insurance (LMI).
6. Interest Rates
Lower interest rates can boost your borrowing power by reducing the cost of repayments. Horizon Bank offers competitive, customer-focused rates designed to help first-home buyers.
7. Loan Term
Opting for a longer repayment term can lower your monthly obligations, increasing your borrowing capacity. However, this also means you’ll pay more interest over the life of the loan.
Tips to Maximise Your Borrowing Power
If you want to increase your borrowing capacity and secure better loan terms, consider the following practical strategies.
Reducing existing debts is one of the most effective ways to improve your borrowing power. By paying off personal loans, car loans, and eliminating credit card debt, you lower your liabilities and present yourself as a less risky candidate to lenders. This frees up more of your income, allowing you to borrow more for your home.
Increasing your income can also positively impact your borrowing capacity. Whether it’s negotiating a salary raise, taking on freelance work, or starting a side hustle, any additional income strengthens your financial position in the eyes of lenders.
Saving for a larger deposit should be a key focus. A bigger deposit not only reduces the amount you need to borrow, but it can also improve your lending profile. It may help you avoid Lenders Mortgage Insurance (LMI), saving you additional costs in the long run.
How Horizon Bank Can Help
At Horizon Bank, we understand that buying your first home is a major milestone, and we want to make the process easier for you.
Personalised Support
Horizon Bank prides itself on providing personalised, local customer service. Our team doesn’t rely on overseas call centres or one-size-fits-all answers. Instead, we get to know your financial circumstances and work with you to develop a clear, achievable plan.
Competitive Rates and Flexible Options
As a customer-owned bank, our profits are reinvested in our members through lower interest rates and improved loan options. We’re here to help you make the most of your borrowing power with loans tailored to your needs.
Expert Guidance for First Home Buyers
Buying your first home involves many moving parts, but you don’t have to go it alone. Whether it’s helping you reduce debt, save for a deposit, or understand government grants, we’ll be with you every step of the way.
Take Control of Your Borrowing Power
Maximising your borrowing power is all about thoughtful planning and having the right support system. By understanding how borrowing power works and taking concrete steps to boost it, you’ll be in a stronger position to make your property dreams a reality.
Take the first step today! Speak to one of our Horizon Bank lending experts to learn more about increasing your borrowing capacity and securing your first home loan.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant General Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.
