3. Borrowing Capacity
Understanding how much you can borrow is key when selecting the right property. You don't want to get your heart set on a purchase that you won't get approved for. Understanding how the banks determine your borrowing capacity is essential especially if you are still in the savings stage, or you want to change your current situation.
Whether you're buying your own home or whether you're buying an investment property it's critical that you understand what your borrowing capacity is so let's go through that right now. By definition, your borrowing capacity is how much the lender assesses that you can afford to borrow based on your disposable income and the key part there is your disposable income.
Let's break down your income now. You've got your entire income over here on the side. The first element that's going to go out the door is the cost of your living, and that's by your marital status and also your postcode. So the banks already have a preconceived number of how much you're actually spending with your cost of living.
The second element there is your rent or your homeownership costs. That's how much you're paying in rent each week or if you've already got a mortgage that's how much is going out the window on your own repayments as well that you're going to have to maintain when you're buying another property.
The third element is your personal loans whether that be a car loan or whether you've got a special loan from the furniture store to be able to decorate your property as well.
The fourth element there is dependents. The banks absolutely know that kids cost a bucket load of money every single year, so they're going to take that into account and draw it straight out of your income as well.
And then credit cards. The banks know that you have the capacity to draw as much off that credit card as your maximum limit, so they'll actually apply up to a five times multiple on your credit card limit, so if you've got a five thousand dollar credit card limit they might take 25 thousand dollars off your borrowing capacity as well so that could really hurt your borrowing capacity.
The remainder at the top that you've got there is what's considered your disposable income, and that is what the banks are going to base your borrowing capacity off, so it's really important to present yourself in the best light towards the bank. Minimize all of these elements down the bottom here to maximize your disposable income, and you'll have a really good chance of getting finance secured.
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