How much can I borrow for a home loan?

Property investment usually requires a financial commitment, specifically a home loan. Identifying how to enhance your credit score can significantly impact your borrowing capacity. We have prepared a guide to help you increase the amount you can borrow from the bank.

What is a credit score?
A credit score is a number between 0 and 1,000 (some banks score up to 1,200). The higher the number, the better the chances of getting your loan and the bigger the amount you can borrow.

The credit score is based on a combination of what you have been loaned in the past, credit cards you have previously or currently have and your history of paying bills on time.

Organising your finances for a home loan
Nowadays, inflation and interest rates are slightly higher (see Interest lifted. Should I buy a property investment).

However, an investment property is still the safest and best asset to buy (tax deductions mean you get money back at tax time from the ATO, property earns you more income than keeping your money in a savings account with the bank, less risk than shares or cryptocurrencies, higher capital growth). So, it is time to get ready for a home loan approval, if you are not already.

There are at least six factors that define how much you can borrow from a mortgage lender:

• Income
• Savings
• Job History
• Credit history
• Loans and Credit Cards
• Lifestyle Expenses

Income
The lender will ask for proof of your monthly income to ensure you can cover your monthly repayments. It means the money you receive monthly to pay for your expenses and lifestyle.

To prove your income, most lenders ask you to provide up to three consecutive payslips no older than 60 days or the last two complete years of tax returns if you are a business owner.

Savings
Saving extra money in your bank account can help you increase your credit score.

First, you need to have money or equity for the deposit, usually between 5% and 20% of the property value (see How much do I need to buy an investment property in Australia?).

Second, it will be even better if you have reserves in your bank account to back yourself up in the future. Lenders consider how you’ll cover the monthly repayments if your income gets reduced.

Credit history
A lender will also assess your credit history to calculate your credit score. Each lender has its score, but you can find an estimate in the table below:

Score	Evaluation	Description
509 or less	LOW	High risk, difficult to approve a loan
510-624	AVERAGE	Would need extra documentation
625-699	GOOD	Good chance to get a loan
700-799	VERY GOOD	Most lenders will approve a loan
800-1000	EXCELLENT	Easy to get approval

You can get an online credit report as soon as 24 to 48 hours from agencies like Equifax, illion or Experian.

Loans and Credits cards
Your current financial commitments will impact your credit score in two ways. First, in the limit capacity of your credit cards or other loans (personal loan, car loan, other home loans). Second, the lender will evaluate your capability to pay on time. In the past, if you have not paid your credits or bills on time, it can affect your credit score.

Lifestyle Expenses
Your living expenses are also under consideration when asking for a home loan. All the money you spend on groceries, petrol, education, health, entertainment, bills, insurance, children, pets, and more, will impact your borrowing capacity.

The lender will request access to your bank statements to assess your monthly expenditure versus your income. The lender will also compare your family expenses with the HEM (Household Expenditure Measure) published quarterly by the University of Melbourne.

How to increase your borrowing capacity and chances for approval?
A Mortgage Broker is the person that helps you to evaluate what could be the best outcome for your home loan. The mortgage broker will assess your lifestyle and financial goals to connect you with the lenders that best suit your needs.

At Property Ducks, we will prepare a shortlist of suitable properties according to your borrowing capacity and goals and we connect you with an experienced Mortgage Broker early in the process to understand your mortgage capacity. Contact us now to start your property investment journey.