Understanding Your True Repayment Capacity: Beyond Basic Calculators

When you're ready to borrow for a home or investment property, one of the first things you'll want to know is "how much can I borrow?" You might turn to online calculators for a quick answer, but most basic calculators only scratch the surface.

To truly understand your repayment capacity, you need tools that think like a lender. That's exactly what we've built at https://www.astute.online/calculators - calculators designed to give you a realistic view of what you can actually borrow.

Why Basic Calculators Fall Short

Most online calculators use simple formulas that don't reflect how lenders actually assess applications. Real lending assessment is far more nuanced, using sophisticated serviceability calculations that consider dozens of factors and stress-test your ability to handle future changes.

Income: It's Not Just What You Earn

Lenders don't just look at your gross income - they focus on your after-expense income, what's actually available to repay a loan. Examples of considerations lenders use when reviewing your ability to borrow for property:

For PAYG Employees:

●      HECS/HELP repayments that increase with your income

●      Salary sacrifice arrangements

●      Union fees and professional memberships

●      Other pre-tax deductions

For Self-Employed Borrowers:

●      Net profit after business expenses (often averaged across multiple years)

●      Some business expenses might be added back if they're not ongoing

●      Different lenders have varying approaches to self-employed income

Your borrowing capacity is based on this after-expense income, not your gross salary - a distinction that can significantly affect how much you can borrow.

Liabilities: Every Limit Counts

Thanks to positive credit reporting in Australia, lenders have comprehensive information about your credit commitments. This transparency works both ways - they can see positive payment history, but also spot anything you might have "forgotten" to disclose.

Credit Card Limits (Not Just Balances) This catches many people off guard. Even if you pay off your credit cards in full each month, lenders assess based on the full limit of each card. A $10,000 limit might reduce your borrowing capacity by $50,000 or more.

Buy-Now-Pay-Later Accounts Afterpay, Zip Pay, and similar services are increasingly scrutinised. Even small limits can impact your assessment, and multiple BNPL accounts add up quickly.

Existing Loans Car loans, personal loans, and other commitments are assessed using current repayment amounts, not remaining balances. Some lenders may project these payments continuing for the life of your home loan.

The Buffer Factor

Lenders don't just assess your ability to make repayments at current rates. They apply buffers to ensure you can handle:

●      Interest rate increases (typically 2-3% above current rates)

●      Changes in your financial circumstances

●      Unexpected expenses or income reduction

Each lender applies these buffers differently, which is why you might get approved with one lender but not another, even with identical circumstances.

Security & Equity: The Final Piece

While income and liabilities determine borrowing capacity, your security and equity influence loan terms and approval.

Deposit considerations:

●      You can contribute as little as 5% plus purchase costs, but this will reduce your borrowing capacity as it will result in a higher assessment interest rate. 

●      20% deposit plus, avoids Lenders Mortgage Insurance (LMI), and will reduce the assessment interest rate.

For refinancing or equity use:

●      Bank Valuation rather than a real estate value affects available equity

●      Location and property type influence lending policies

●      Different lenders have varying appetites for certain areas

Beyond the Numbers

Remember, repayment capacity is just one part of loan approval. Lenders also consider employment stability, credit history, the property you're purchasing, and your overall financial goals.

Take the Next Step

Ready to get an accurate picture of your borrowing capacity? Visit https://www.astute.online/calculators to access comprehensive tools designed with real lending criteria.

For a personalised assessment, contact our team at Astute East Brisbane. We'll help you understand not just how much you can borrow, but how to structure your finances for the best outcome.

Call us on (07) 3667 8988 or visit our website to get started with confidence.

This information is general in nature and current as at June 2024. Individual lending criteria vary between institutions. We recommend speaking with a qualified mortgage broker to understand your specific circumstances.

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Disclaimer:

Astute Financial Management Pty Ltd | ACN 093 587 010 | Australian Credit Licence 364253 | Davgan Insurance & Wealth Pty. Ltd. T/As Astute East Brisbane Corporate Authorised Representative (425641) of Alliance Wealth Pty Ltd | ABN 93 161 647 007 | AFSL 449221. www.centrepointalliance.com.au/aw | General Insurance provided by Astute Insurance Pty Ltd | ABN 59 622 582 236 | Authorised Representative of Ausure Pty Ltd ABN 94 096 971 854 AFSL 238433. Health Insurance products are underwritten by St Luke’s Medical and Hospital Benefits Association ACN 009 479 618 (St.LukesHealth), a registered private health insurer, [trading as Astute Simplicity Health] and members are introduced by Astute Financial Management Pty Ltd or related entities (collectively known as Astute) for which Astute receives a commission.

General Advice Warning: 

This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. The author as well as their representatives, agents and employees give no guarantees and make no representations, express or implied, as to the accuracy, currency, completeness or suitability of the information contained in this document. Nor do they accept any liability whatsoever as a result of any information herein being incorrect, incomplete or unsuitable or as a result of a person in any way using or relying on the information herein.