Most people start thinking about their next property well before they speak to a broker.

They have been watching the market, looking at suburbs, checking recent sales and working out roughly what their current home might be worth.

Eventually the question becomes:

What can we actually spend?

For established families, professionals and business owners, the answer is often more complicated than expected.

A strong income helps, but it does not tell the whole story.

What Affects Your Home Loan Borrowing Capacity?

When a lender works out your borrowing capacity, they are looking at a lot more than just your salary.

They may consider things such as:

  • Your existing home loan
  • Investment property debt
  • Credit card limits
  • Car loans and personal loans
  • Rental income
  • Bonus, commission or overtime income
  • Business or partnership income
  • HELP debt
  • Dependants and household expenses
  • School fees and other regular commitments

The way each lender assesses those things can also be different.

That is why two lenders can look at exactly the same household and come back with very different borrowing capacity.

Equity and Borrowing Capacity Are Not the Same Thing

This is one of the most common misunderstandings I see.

Say your home is worth $2 million and you owe $700,000.

On paper, you have $1.3 million in equity.

That does not mean you automatically have another $1.3 million available to buy your next property.

The lender still needs to be comfortable with the total amount of debt you will have after the purchase.

Equity may help with the deposit and purchase costs, but borrowing capacity still determines how much debt the bank is prepared to let you take on.

This becomes particularly important if you are planning to keep your current home rather than sell it.

A High Income Does Not Always Mean High Borrowing Power

We regularly speak with professional couples earning $350,000, $400,000 or more between them who are surprised by the result when we actually run the numbers.

The income might be strong, but there can also be a large home loan, investment debt, credit cards, car finance, school fees or HELP debt in the background.

Variable income can also make a difference.

A client may receive a substantial bonus or commission each year, but not every lender will use that income in the same way.

For self-employed clients, the difference can be even greater because the lender may need to understand company profit, trust distributions, retained earnings or how the business income flows through to the individual.

This is where lender selection starts to matter.

Your Existing Investment Loans Can Have a Bigger Impact Than You Expect

If you already own investment property, the servicing calculation can look very different to your actual monthly cash flow.

Lenders generally shade rental income, meaning they do not use every dollar of rent you receive.

At the same time, they may assess your existing investment loans at a higher rate than the actual rate you are paying.

If the loan is interest only, the assessment can also become more conservative because the lender may calculate the future principal and interest repayment over the remaining loan term.

So on paper, the property may be performing comfortably.

In the bank’s servicing calculator, it may look very different.

This is one of the reasons investors can find their borrowing capacity reduces as the portfolio grows.

Related: This is something we cover in more detail in Why Your Existing Investment Loans Can Limit What You Borrow Next.

Borrowing Capacity Before You Buy or Before You Sell?

For someone upgrading their home, one of the big questions is often whether to sell first or buy first.

That decision can completely change the lending structure.

If you sell first, the lender may only need to assess the new home loan after your existing debt has been repaid.

If you buy first, there may be a period where you are carrying both properties at the same time.

That can mean a much higher temporary debt position.

Depending on the circumstances, we may look at standard lending, accessing equity or bridging finance.

The important thing is working through the numbers before you sign a contract, rather than trying to make the structure fit afterwards.

Related: See Buying Before You Sell: What Are Your Options?

A Pre-Approval Should Give You More Than a Maximum Loan Amount

A good pre-approval should give you some clarity around the whole purchase, not just tell you the maximum amount a lender might approve.

I want clients to understand what purchase price range makes sense, how much cash they need, how much equity may be available, what the total debt looks like after settlement and what repayments are likely to be.

I also want to know how much cash they want left over.

There is a big difference between being technically able to complete a purchase and being comfortable once it settles.

The maximum borrowing capacity is not always the number you should actually use.

The Cheapest Lender May Not Give You the Best Borrowing Capacity

This is another area where people can get caught focusing on one number.

A lender might have a very sharp interest rate but assess your income or existing debts quite conservatively.

Another lender may be slightly more expensive but give you a substantially better borrowing result.

That does not mean I would automatically recommend the lender that lets you borrow the most.

We still need to consider the rate, fees, loan features, structure and what you are planning to do in the future.

The goal is to find a lender that fits the overall position.

Think About the Next Property Before You Need the Loan

You do not need to have found the property before you start working this out.

In fact, I would rather have the conversation earlier.

If you are likely to upgrade, buy an investment property or make another property move in the next six or twelve months, we can start by looking at the current position.

That might mean checking your existing lending, understanding available equity, looking at how different lenders assess your income and working out a realistic purchase range.

It is much easier to make decisions when you already know the numbers.

Thinking About Your Next Property?

If you are starting to think about your next home or investment property, we can work through your borrowing capacity before you get too far into the search.

Book a strategy call with me and we can look at your current lending, income, equity, existing commitments and what different lenders are likely to let you do.