Mortgage lenders may look at more than just your financial situation when assessing your borrowing power. A few other factors that could affect how much you can borrow include:
Because a home loan is secured by the value of the property, your credit score may not play as large a role when applying for a mortgage as it may when applying for a personal loan or a credit card. However, your record of borrowing and repaying money can still help a lender get a better idea of your financial responsibility, so borrowers with bad credit may find it harder to successfully apply for a home loan than a borrower with a good credit score.
Outstanding debts (including credit cards and HECS/HELP debt)
If you already owe money on personal loans, car loans or other debts such as education loans, a responsible lender may not be willing to lend you more money that could put you into financial stress. Paying off your outstanding loans may help to boost your borrowing power.
Keep in mind that when it comes to credit cards, a lender may look more closely at your maximum credit limit than your current credit balance. A responsible lender will consider a ‘worst case scenario’ where you are paying interest on a maxed-out credit card limit to determine if you could still afford your mortgage repayments.
Whether or not you’re currently renting
If you can afford rent, surely you could afford a mortgage, right? Unfortunately, lenders may not see it that way. Even if you could afford a mortgage with repayments equal to your current rent, what if interest rates were to rise?
Even if you’re living with family and not currently renting, lenders may still factor ‘notional rent’ into your expenses when calculating your borrowing power to account for the risk that your living situation could change and you may need to start renting soon.
When looking at your income and expenses, some lenders may note if you’re regularly spending a significant amount on takeaway food, buy now pay later services like Afterpay, and more. This may indicate that you’re less than responsible with your money, which may make the lender less willing to lend you a large sum to buy a house.