What is borrowing power and how does it affect your property goals? Fear not, because it’s not as complicated as it sounds. Simply put, your borrowing power is the estimated maximum amount a lender will let you borrow to secure a mortgage.
While it’s not a concrete offer, it is a good starting point based on your financial health and affordability. Think of it as a compass leading the way towards a realistic price range for your new home.
What factors determine your borrowing power?
Several factors contribute to your borrowing power, each playing an important role in your lender's assessment of your overall financial situation.
Income
Your stable income forms the foundation. Higher salaries generally translate to greater borrowing power.
Debts
Existing loans and credit card balances chip away at your disposable income, potentially reducing your borrowing power.
Spending
Just like balancing a budget, lenders analyse your essential expenses (bills, food, dependents, etc.) to assess how much you can comfortably afford to repay each month.
Credit score
This number reflects your past credit history, indicating your repayment reliability. A good score strengthens your borrowing power, while a poor one can tighten the lender’s purse strings. Having adverse credit doesn’t make it impossible to borrow from a lender, but it does severely limit your options as you are seen as a risky borrower.
How to calculate your borrowing power?
While each lender has its own unique criteria, many offer online borrowing power calculators as a helpful step in the right direction. These tools provide estimated figures based on your basic financial information.
If you’re wanting a more detailed assessment of your borrowing power, submitting a formal mortgage application to a lender through an experienced adviser will provide you with more information.
Does anything else affect your borrowing power?
Borrowing power is not solely a mathematical equation. Lenders also consider your future stability, career prospects, and potential changes in income. Open communication about your financial plans and goals can paint a clearer picture and potentially boost your borrowing power.
Understanding your borrowing power is key to making informed decisions and navigating the mortgage market with confidence. Remember, it's an estimate, not a limit. Try to aim for a comfortable monthly repayment that fits your lifestyle, leaving room for financial flexibility and future goals.
With responsible planning and informed choices, your borrowing power can unlock the door to your dream home. When you’re ready to take a step further in the mortgage process, speak to one of our experienced advisers.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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