Borrowing power is becoming the topic of today, after all it means how much I could borrow from the bank. This is important because borrowing power usually sets the limit to the value and/or amount of the properties we can purchase. Borrowing power is especially important for people who are in accumulation stage. This is the stage when people purchase properties to accumulate or grow their portfolio.
How is borrowing power calculated?
Each bank has its own, below is a very general guide showing how borrowing power is calculated, assuming weekly expenses of $250 only. Even banks provide only a general guide, you can punch the numbers here for: CBA, ANZ, Westpac and NAB.
Each bank has their own way of calculating it, so you have to seek professional advice and approach the bank or broker before making any decision.
Tips to increase borrowing power
Reduce non-productive debt.
We think this is a very important step to increase borrowing capacity. For example, credit card debt, new card lease or store debt are all debts that would impact our borrowing capacity. And often the impact is not a straight line. A $15,000 credit card debt doesn’t reduce the borrowing capacity by that amount, often the impact is much larger and could reduce borrowing capacity by $30,000 or more.
Cut down on discretionary spending.
Certain spending would impact borrowing capacity. Often banks look at how much money left after expenses before they decide on how much they can loan. If the person spends a lot on dinners, going out and other discretionary expenses, often this means less money will be provided to borrow. So we make sure we keep an eye on our expenses. A handy overview of discretionary spending can be found here. A more step by step guide can be found here.
Another possible way to increase borrowing capacity is to increase the income. Whether that is through promotion, second job, business or a side gig is up to the person. It is clear, from the chart and table at the start of this article, that the borrowing capacity is influenced by income. The higher the income, the higher the borrowing capacity, everything else remaining equal.