Lending Capacity Formula: A Rule Of Thumb For Borrowing Power

Are you interested in taking out a home loan but don't know how much you can borrow? The good news is that there is a simple rule of thumb that can help you understand your borrowing power. It's known as the lending capacity formula and in this blog post, we'll explain how it works and how you can use it to your advantage. We'll also look at other factors that can influence your borrowing power, so you can make an informed decision about your home loan. So, if you want to find out how much you can borrow, read on!

1.What is the Lending Capacity Formula?

The Lending Capacity Formula is one of the most important tools used by mortgage brokers when assessing a borrower's borrowing power. It is a rule of thumb that helps mortgage brokers estimate an individual's borrowing power before they apply for a loan.

The formula is based on a number of factors, including the borrower's current income, monthly expenses, and any existing liabilities or debts. The formula also takes into account the borrower's credit history, the value of the property they are looking to purchase, and the interest rate of the loan.

The formula works by calculating the maximum loan amount the borrower can borrow based on their current financial position. This is done by subtracting the borrower's existing liabilities from their total income, and then subtracting their monthly expenses from this figure. This gives the broker an estimate of the borrower's borrowing power.

The Lending Capacity Formula is a valuable tool for brokers as it helps them assess a borrower's financial position before they apply for a loan. It helps them to determine whether the borrower will be able to meet the loan repayment requirements, and can help them decide whether the loan is suitable for the borrower.

By using the Lending Capacity Formula, mortgage brokers can make an informed decision about whether a borrower can meet their loan repayment requirements. This can help make sure that the borrower is not taking on more debt than they can realistically afford to repay. It is important to consider the borrower's financial situation carefully before applying for a loan, and the Lending Capacity Formula can help brokers do this.

2.How to Calculate Your Borrowing Power

The Lending Capacity Formula, or LVR (Loan to Value Ratio) is a rule of thumb for assessing a borrower’s borrowing power. It is a quick and easy way to determine how much you can borrow in a loan, based on the value of the property you are looking to purchase.

To calculate your borrowing power, you will need to know the Loan to Value Ratio (LVR), which is the ratio of the loan amount to the value of the security. In Australia, the LVR is usually expressed as a percentage of the loan amount against the property value. For example, if the LVR is 80%, the loan amount would be 80% of the value of the property.

The LVR is an important figure to consider when calculating your borrowing power, as it helps lenders assess the risk in lending to you. Generally, the lower the LVR, the better the chances of qualifying for a loan. A higher LVR can indicate that you are more likely to default on the loan, as you are borrowing more than the property is worth.

In addition, lenders will look at your income and expenses, as well as your credit history and employment status when assessing your borrowing power. They want to make sure you can afford to make the repayments on the loan, so they will take into account your ability to repay the loan over time.

When calculating your borrowing power, it is important to remember that lenders look at more than just the LVR. Your ability to repay the loan is also taken into consideration, as is your credit history and employment status.

It is important to be realistic when assessing your borrowing power. Be honest about your income and expenses, and make sure to factor in all of your costs when determining how much you can borrow. By doing this, you will be able to make an informed decision about your borrowing power.

3.Factors that Impact Your Lending Capacity

When it comes to your lending capacity, there are three main factors that you should consider. These include your income, expenses and liabilities.

Your income is an important factor when it comes to calculating your borrowing power. Lenders will look at your income and assess what you can realistically afford to borrow. This includes your wages, any investments, rental income and any other income sources. It’s important to be realistic when assessing your income as lenders will take into account your debt-to-income ratio.

Your expenses are also taken into account when calculating your borrowing capacity. Lenders will look at your monthly expenses such as rent, car payments, credit card bills and any other outgoings. It’s important to be realistic with your expenses as this will help lenders to get an accurate picture of your financial situation.

Finally, your liabilities are taken into account when assessing your borrowing capacity. This includes any existing loans or debts that you have, such as a home loan, car loan or credit card debt. It’s important to be honest about your liabilities as this will help lenders to determine your borrowing capacity.

Overall, it’s important to be honest and realistic when assessing your borrowing power. Do your research and make sure that you understand all the factors that can impact your borrowing capacity. This will help you make informed decisions when it comes to applying for a loan.

4.Tips to Increase Your Borrowing Power

When it comes to increasing your borrowing power, there are a few tips that may help you get the most out of your application.

Firstly, it’s important to build a good credit history. This means making sure your credit file is up to date and accurate, as lenders will use this as a reference when assessing your loan application. Paying your bills on time and keeping your credit card balance as low as possible will help you build a good credit history.

Secondly, it may be beneficial to save a larger deposit. Aiming for a 20% deposit of the purchase price can significantly improve your borrowing power. Having a larger deposit means you will need to borrow less and can reduce the amount you will need to pay in interest.

Thirdly, it is important to consider the terms and conditions of your loan. The interest rate is an important factor and it is worth shopping around to make sure you are getting the best deal. It is also important to consider the loan term, as this will affect how much you will need to pay each month and the total amount you will need to repay.

Finally, it is important to consider the impact of your other debts and liabilities. Lenders will assess your other debts and liabilities when assessing the amount you can borrow, so it is important to think about how they may affect your borrowing power. It may be beneficial to consider consolidating your debts or paying off some of your existing debts to help improve your borrowing power.

By following these tips, you can ensure that you are in the best possible position to increase your borrowing power. Make sure to keep an eye on your credit history, save a larger deposit, consider the terms and conditions of your loan, and consider the impact of your other debts and liabilities. These tips can all help to improve your borrowing power and make it easier to get the loan you need.

We understand you and we want to help

At Ello Lending, we understand that the lending capacity formula can be confusing and hard to get your head around, but we are here to help. Whether you’re a first-time home buyer, a property investor, or just looking to refinance, we can help you work out your borrowing power. If you have any questions or would like to discuss your options further, please don’t hesitate to contact us. We’d love to help you make the right decisions when it comes to your finances.