Your borrowing capacity is a crucial determinant of how much you can invest in property. It represents the maximum amount a lender is willing to loan you, considering various factors such as your income, existing financial commitments, and credit history. Lenders assess these elements to ensure you can comfortably service the loan repayments.
Under Australian lending guidelines, your borrowing capacity is influenced by several factors:
- Income: Your salary, rental income, and any other regular earnings.
- Expenses: Living costs, existing loan repayments, and other financial commitments.
- Credit history: Your credit score and history of managing debts.
- Loan term and interest rates: The length of the loan and the rate offered can affect the maximum loan amount.
To see how this plays out, consider a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, valued at $700,000. If you earn $120,000 annually and have monthly expenses of $3,000, your borrowing capacity might allow you to finance up to $560,000, assuming a 20% deposit. With a 5% interest rate over 30 years, your monthly repayments would be approximately $3,000.
In our experience reviewing thousands of properties across Australia, we've seen that investors often overlook the impact of personal debts on borrowing capacity. Many fail to optimise their credit score before applying for loans, which can significantly affect the interest rates offered. Additionally, investors sometimes underestimate the value of demonstrating consistent savings habits, which can positively influence a lender's assessment.
The answer can differ depending on your situation. For instance, if you're purchasing a property post-9 May 2017, certain depreciation benefits may not apply, affecting your overall financial strategy. Similarly, if the property is held in a Self-Managed Super Fund (SMSF), borrowing rules differ significantly. Joint ownership can also alter the borrowing capacity calculations, as lenders will consider the combined financial profiles of all owners.
Given the complexity of borrowing capacity calculations, it's wise to seek professional advice. A Chartered Quantity Surveyor and a financial advisor can work together to provide a comprehensive view of your financial position and potential strategies. They can offer insights tailored to your situation, ensuring you maximise your borrowing potential while aligning with your investment goals.
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