Where did all my borrowing capacity go?

13 Months, 11 interest rate rises – that’s why everyone’s borrowing capacity has shrunk 30 percent over this past year.

Firstly, lets look at how borrowing capacity is determined; all lenders have their own calculator, factoring in your income and expenses.

The income side is traditionally more straight forward; your income is your income at that time. The liabilities is where the complexity is, think home loans, credit cards, car loans, personal loans, business loans, overdrafts and even your HECS Debt.

These are all buffered significantly – and in the case of a home loan, they will add a 3% buffer to the actual market rate you pay.

So in today’s market 8.75% – 9.5% assessments rates for residential lending. Credit Cards are the worst offenders, impacting borrowing capacity on an almost 6 times multiple.

I really recommend that people avoid using generic online borrowing capacity calculators – most of them are horribly outdated in terms of the backend interest rates, so the information they provide can be inaccurate.

Make sure you find yourself a great mortgage broker, even if its not someone from The Lending Alliance team. Make an appointment, go through the process the right way – understand what you can and can’t do.

And even if you find out that you can’t purchase and borrow to the level you currently desire, you will be able to set yourself on the necessary path to achieve what you want to, as you will know what is required to get there, instead of floating a little directionless towards that path.