A key process for home seekers is understanding how much they can borrow. This helps buyers understand what type of properties they should be looking at.
What determines borrowing capacity?
The banks look at your net income when deciding how much they will lend. This means your net income minus your expenses. Income generally includes your salary and any rental income – other types of income are considered (i.e dividends, bonus, commissions etc.) but these are often not given as much weighting. Expenses include living expenses as well as any ongoing commitments (i.e any form of debt such as credit cards, other loans).
Figuring out borrowing capacity is often done through online calculator with the lenders (i.e like this one). It is a great idea to find out how much you can borrow but using these calculators are fraught with risk. Part of the problem lies in the accuracy of the online calculators – they simply don’t present the full picture. Every bank has the calculator they use internally vs. the simplified version they offer to the public. Below are the comparison for some of the major lenders in Australia for a borrower* we recently helped at Plenty:
External vs. Internal Calculators
The borrower happened to use the ANZ calculator – they therefore were looking at properties in the $1.7m range when, in reality, $1.3m was more achievable.
Which calculator do lenders use?
Lenders don’t care about what the website calculator says – they all have their own internal methods of calculating how much they will lend. These calculators are not made available to the public.
Why the $500,000 difference?
The difference between the public and internal ANZ/Macquarie calculators is a staggering $500,000 – the other lenders are somewhat in the ballpark but still have substantial difference between the two. These differences are driven by numerous factors:
- Internal vs Website – A number of the calculators online do not collect the same level of information that the internal calculators do. For example – the ANZ calculator doesn’t consider the structure (i.e interest only) or balance of your existing loans when assessing your borrowing ability. Therefore the online calculator is not going to give an accurate picture of what the bank actually will lend.
- Inaccurate Information – borrowers are sometimes unsure or forget about their liabilities. For example – HECS debt is something people often don’t consider when they use the online calculators however it has a big impact on serviceability. Another item is credit cards; even if a borrower hardly ever uses their card the banks still consider them when considering how much to lend.
- Internal Policies – Different banks have different ways of assessing lenders and that is why all banks will lend different amounts to different people. A number of these policies are not reflected accurately in the calculator – i.e rental income from different properties isn’t considered at 100% for internal calculators but this isn’t reflected in the online version.
- Assessment Rate – when considering your existing loans banks don’t look at the interest rate you are paying but rather use an “assessment rate” that is generally 3-4% higher than your existing rate.
- Negative Gearing – The online calculators often don’t consider the negative gearing benefits to the borrowers while some of the internal calculators do; this means that borrowers can sometimes borrow more than.
- Banks best interest – it’s often in the banks interest to tell you they can lend more than what they actually will therefore the calculators are probably tweaked differently.
How can Plenty help assess your borrowing power?
The only way to get an idea of your exact borrowing power is speaking to the bank themselves. The problem with this method is you will need to call 20 banks to get an idea of your borrowing power with each one. Plenty, your financial GPS, can get a complete picture of your financial situation allowing us to give you an accurate assessment of your borrowing power with multiple lenders.
*Borrowers key financials below:
|Applicant 1||Applicant 2|
|Credit Card Limits||6,000||4,500|
|Monthly HECS Payments||984|
|Monthly Living Expenses||1,500||1,500|