How Much Can You Borrow?

How Much Can You Borrow? Factors That Determine Your Home Loan Amount as an Investor

For property investors, understanding how much you can borrow is a crucial step in the process of securing financing for an investment property. Whether you’re looking to buy your first property or expand an existing portfolio, your borrowing capacity will play a significant role in determining your potential for success.

Lenders assess a variety of factors to determine how much you can borrow, and understanding these factors can help you make better decisions when applying for a home loan. In this article, we will explore the key elements that influence your borrowing capacity, including your income, expenses, credit history, loan-to-value ratio (LVR), and other considerations that may impact the final loan amount.

By understanding how these factors work together, you will be better equipped to navigate the home loan application process and optimise your chances of securing the funding you need to grow your investment property portfolio.

1. Income: The Foundation of Borrowing Capacity

Your income is one of the most important factors when determining how much you can borrow. Lenders rely on your income to ensure that you will be able to repay the loan without overextending yourself financially. The higher your income, the more likely you are to be approved for a larger loan amount.

However, income alone is not the only consideration. Lenders will assess your overall financial situation to determine whether you have the capacity to manage both your existing financial obligations and the new property investment.

Types of Income Considered

When applying for an investment property loan, lenders will consider different sources of income, including:

• Salary and Wages: Regular income from employment is the most common source of income lenders consider. Lenders will typically ask for payslips or tax returns to verify your income level.
• Investment Income: If you already own investment properties, rental income can be counted towards your borrowing capacity. However, this income is often assessed at a lower rate (usually 70–80%) to account for potential vacancies and property expenses.
• Business Income: If you are self-employed or own a business, lenders will assess your business income, typically looking at the last two years of tax returns or financial statements. Self-employed applicants may face stricter lending criteria, as lenders need to verify the stability and sustainability of their income.
• Other Income: This can include bonuses, overtime, dividends, or income from additional assets (such as savings or shares).

What to Look For

The more diverse and stable your income sources, the better your chances of borrowing a larger amount. Lenders will prefer consistent income over irregular or unpredictable earnings. Additionally, a stable job history and a steady income flow will reassure lenders that you are a reliable borrower.

2. Expenses: How Much You Spend vs. Earn

While income is important, lenders also pay close attention to your living expenses. This includes everything from your monthly bills to discretionary spending, such as entertainment, groceries, and transport. The lower your expenses relative to your income, the higher your borrowing capacity.

Lenders calculate your debt-to-income ratio (DTI) to gauge how much of your income goes towards servicing debts. A lower DTI means that you have more disposable income available to take on a new loan, making you a more attractive borrower.

Types of Expenses Considered

Lenders will ask for a detailed breakdown of your living expenses, including:

• Fixed Expenses: These are regular, predictable costs, such as rent/mortgage repayments, utility bills, insurance, and loan repayments.
• Variable Expenses: These include everyday spending on things like groceries, transport, and discretionary spending.
• Existing Loan Repayments: Any current home loans, car loans, personal loans, or credit card debts will be factored into your overall expenses. Lenders will assess your ability to manage these repayments in addition to the new home loan.

What to Look For

To improve your borrowing capacity, it’s essential to minimise unnecessary expenses and reduce outstanding debts before applying for a loan. Lenders may also take into account any dependents or financial commitments that affect your disposable income.

Additionally, maintaining a solid credit record and paying off high-interest debts, such as credit cards, can improve your borrowing capacity by reducing your overall monthly commitments.

3. Credit History: How Your Past Affects Your Future

Your credit history is another significant factor that lenders consider when determining your borrowing capacity. A good credit score indicates to lenders that you have a history of managing debt responsibly, which can increase your chances of securing a loan and borrowing a higher amount.

Your credit score is calculated based on various factors, including:

• Timely Repayments: Regular, on-time payments on credit cards, loans, and other credit facilities.
• Credit Utilisation: The percentage of available credit you use on credit cards and revolving credit facilities.
• Credit Applications: Frequent credit applications can be seen as a sign of financial stress and can negatively affect your credit score.
• Public Records: Any bankruptcies, defaults, or judgements against you can severely damage your credit rating.

What to Look For

Before applying for a loan, check your credit score and address any issues that might lower it. This could include paying off outstanding debts, disputing any incorrect listings on your credit file, or avoiding unnecessary credit applications.

If you have a low credit score, lenders may offer you a smaller loan, charge a higher interest rate, or may even decline your application entirely. A strong credit score is essential to improving your borrowing capacity.

4. Loan-to-Value Ratio (LVR): How Much You Need to Borrow vs. Property Value

The Loan-to-Value Ratio (LVR) is a key metric used by lenders to assess the level of risk involved in providing you with a home loan. It represents the ratio of the loan amount compared to the value of the property you’re purchasing. A higher LVR means you are borrowing more in relation to the property value, which increases the risk for the lender.

What Lenders Look For

• Standard LVR: Most lenders typically offer home loans with an LVR of up to 80%. This means you would need a deposit of at least 20% of the property’s value.
• Higher LVR: Some lenders may offer home loans with an LVR of 85%, 90%, or even higher. However, these loans often come with additional costs, such as Lenders Mortgage Insurance (LMI), which protects the lender in case of default. LMI can add significant costs to your loan and reduce the overall amount of money you can borrow.
• Deposit Size: The larger your deposit, the lower your LVR, which means less risk for the lender and better loan terms for you. A larger deposit may also allow you to avoid LMI.

What to Look For

The higher your deposit, the more likely you are to be approved for a larger loan amount, as it reduces the lender’s risk. If you can manage a 20% or higher deposit, you will have access to better loan terms, lower interest rates, and avoid LMI.

5. Property Type and Location: Assessing the Risk of the Investment

The type of property you’re looking to buy and its location also play a role in determining how much you can borrow. Lenders may offer different loan amounts based on the perceived risk of the property and the expected returns on investment.

What Lenders Look For

• Property Type: Lenders may be more willing to finance a traditional home or unit than more niche property types, such as a holiday home, off-the-plan property, or rural property. These can be considered higher risk and may require larger deposits or higher interest rates.
• Location: Properties in high-demand areas with strong growth potential are generally considered lower risk by lenders, which may increase your borrowing capacity. On the other hand, properties in remote or less sought-after locations may limit your borrowing power.

What to Look For

Ensure that the property you’re investing in aligns with the lender’s risk profile. If you’re buying in a high-demand area, you may be able to borrow more, but if you’re purchasing in a less desirable location or a property type with higher risk, you may face stricter lending criteria.

6. Debt-to-Income Ratio (DTI): Your Overall Financial Picture

Your Debt-to-Income (DTI) ratio is the total amount of debt you have compared to your income. Lenders use the DTI ratio to assess how much of your income is already tied up in existing debt. A higher DTI ratio means you’re already stretched financially, which could limit your borrowing capacity.

What Lenders Look For

Lenders generally prefer a DTI ratio of less than 40%, although some may allow a higher DTI depending on your credit history, the type of property you’re buying, and other factors.

What to Look For

Reducing your existing debts and keeping your DTI ratio as low as possible will improve your chances of securing a larger loan. Pay down high-interest debts, such as credit cards, before applying for an investment property loan.

Understanding the factors that determine how much you can borrow is key to navigating the property investment process successfully. Your income, expenses, credit history, LVR, and the type of property you’re purchasing all play a role in shaping your borrowing capacity. By managing these factors wisely and preparing yourself with the right information, you can maximise your chances of securing the loan amount you need for your next property investment.

If you’re serious about growing your property portfolio, it’s essential to work with a mortgage broker or financial advisor who can help you assess your borrowing power and find the best loan options for your individual circumstances.

Learn the key factors that determine how much you can borrow as a property investor. This comprehensive guide explores the impact of your income, expenses, credit history, loan-to-value ratio (LVR), and more on your borrowing capacity. Understand how lenders assess your ability to repay a home loan and discover strategies to maximise your loan amount and secure the best financing for your investment property.