Understanding Borrowing Capacity | How Much Can You Borrow?

Video Transcript

Robbie: Hey, it’s Robbie again. This second video on the series is all about borrowing capacity.

You would have heard me talk about during the four Cs of lending, that bottom left-hand quadrant, how super important it is that you must understand what your borrowing capacity is.

I’ll sort of use the term what’s the left and right of arc as far as what your borrowing capacity is going to be. This is how the lenders work it out.

So you’ve got your net income over here after tax. Remember, gross income is before tax, net income is after tax.

So how much money lands in your bank account after your prepaid deductions have come out? So the definition is all about how much money the lender assesses that you can borrow based on your disposable income, not your net income.

And these are all the deductions that now they need to take into account.

And this is like living, right? So cost of living by marital status and postcode – that’s your HEM. Remember what that’s called? Housing Expenditure Measurement.

Then you’ve got your rent or home ownership costs, your personal loans, or any salary sacrifice into your superannuation or a car.

If you’ve got dependents, that is little kids, bambinos, or if you’ve got a non-working adult. So if your partner is at home and looking after the kids, for instance, then they are a dependent of yours or a mouth to feed, as they like to call it.

Credit cards – let’s just say you got a $60,000 credit card. Many banks apply a five-times limit to that credit.

So even though a $6,000 credit card, which is not very much these days, in fact, it’s a really sound amount to have there. It’s enough for you to use month-on-month, but you know, it’s not going to get you into too much debt. But at the end of the day, that’s like $30,000 less that you can go and borrow sometimes if it’s a little bit close to the line, and we’re sort of making sure we’re maximising what your potential for borrowing is. The mortgage broker might even suggest, like, close your credit card, you don’t need it anymore.

And if you know there’s a time down the track that you can basically reapply for that credit card, that can come into your life.

So you can see then we’re left with this little bit at the top called your disposable income. That’s where they calculate your borrowing capacity in.

Now here’s the thing, I speak to so many other couples, whereby generally, Mum’s at home with the kids, and she goes, “Oh, I think I’m going to go back to work next year and I might earn 30 or $40,000.” I’m like, “That’s fantastic.”

Because if all of your other cost-of-living elements are being taken care of by the primary income earner, you get 30 or 40 grand, it gets chucked on the top, bang. It goes straight into your disposable income.

So even though 30 or $40,000 might be a somewhat moderate amount to earn, and for a lot of returning Mums going back to work two, three, four days a week, that’s pretty, pretty routine, it makes a massive impact on how much you can actually borrow because it goes straight into your disposable income.

And the banks are going to love you, and you may find yourself in the game.