Understanding Your Borrowing Capacity – What to Know

Understanding Your Borrowing Capacity – What to Know

If you’re looking to buy a house, start a new business, or invest in a remodel, you might be in need of a loan. How much money will be loaned to you by a lender is called your borrowing capacity.

What is borrowing capacity?

Borrowing capacity is the amount of money a bank or financial institution will extend to you based on your current financial position. Lenders will compile your sources of income, deduct your outstanding obligations, living expenses, and other financial commitments, and then extract your monthly surplus. The surplus gives them an idea of your ability to repay the money you will borrow.

You can quickly estimate your borrowing capacity by using an online borrowing calculator. You will need to factor in your income details such as your salary, bonuses, or income from rental properties if any. Living expenses, existing loans, and credit card limits will then be subtracted from your gross income. Based on the result, you’ll be provided with an estimate of how much you can borrow.

Other factors that affect this computation include how many dependents you support and the credit policy of the institution. These tools are for estimation purposes only and may not reflect your complete financial position. For a more detailed assessment, it would be best to meet with a qualified Financial Manager so they can take a look at your unique circumstances.

Remember that your borrowing capacity is not a fixed amount, but a picture of your present financial health. If you’re not satisfied with a bank’s current offer, you can do several things to improve your borrowing capacity. Here are five ways you can do this:

1. Revisit your daily living expenses

Taking out a home, construction, or commercial loan will likely bring major changes to your current way of life. Having healthy financial habits will ensure your loans become investments and not additional burdens. Prepare yourself for the change by taking a good look at how you spend your money presently and cut back on your expenses.

2. Start increasing your savings

Aside from a regular income, banks will take a look at how much cash you have saved. Demonstrate the ability to save your money. Cash is a liquid asset and lenders generally regard this well. The better your cash position, the better your assessment will look.

3. Pay off your debts

If you have existing loans and liabilities, try paying them off sooner. Outstanding obligations are counted against your sources of income. If you have multiple credit cards, and some of those are unused, cancel them. Unused credit lines are still counted as liabilities.

4. Improve your credit score

You can do this by catching up on your financial commitments. Make sure you pay your credit cards monthly and in full. Avoid being charged late penalties, not just so you can borrow more money but so you can avoid interest charges. Display a conscious effort to pay your obligations on time.

5. Refinance your existing mortgage

If you’re currently on a 15-year payment plan, visit your loan officer and see if you can work out an extension on your mortgage to 20 or 25 years. This will reduce your present monthly obligations. Keep in mind that this might have higher interest charges so weigh this option carefully based on your needs.

These five are just some initial strategies to get you a better loan. Loans are intended to be a bridge to afford the things you want. Borrowing money should help you achieve your goals, not saddle you with problems. A capable financial advisor will be able to properly assess your needs and can guide you through the process of application.

Consult our finance managers regarding your commercial loans and investment needs in Perth, WA. We are a team of fully qualified, trained, and experienced mortgage professionals who live and breathe finance!