Your Income Hasn't Changed. So Why Has Your Borrowing Capacity?

For many Australians, borrowing capacity can seem fairly straightforward: the more you earn, the more you may be able to borrow.

In reality, income is only one part of the calculation.

You could be earning the same amount as you were six or twelve months ago and find that your borrowing capacity has changed.

For self-employed Australians, tradies and small business owners in Fairfield, understanding why this happens can provide useful context before looking to purchase a home or investment property.

What Can Influence Your Borrowing Capacity?

When assessing a home loan application, a range of factors may be considered alongside your income.

These can include:

• Existing home, car and personal loans
• Credit card limits
• HECS-HELP debt
• Buy now, pay later commitments
• Household and living expenses
• Dependants
• Interest rates and serviceability requirements
• The type and consistency of your income
• Business liabilities for self-employed applicants

Importantly, these factors don't remain static.

You might pay off one debt, take on another, increase a credit limit or experience a change in household expenses.

Lending policies and assessment criteria can change too.

That means your borrowing position today may not necessarily be the same as it was the last time you checked.

Even an Unused Credit Card Can Matter

One area that can catch borrowers by surprise is available credit.

Having a credit card with little or nothing owing doesn't necessarily mean it will have no impact on a home loan assessment.

Depending on the assessment criteria being applied, the credit limit itself may be considered when calculating your existing financial commitments.

For example, someone may have a $15,000 credit card limit but regularly pay the balance in full. While they may not consider themselves to have $15,000 of credit card debt, that available credit can still form part of a borrowing assessment.

The same principle can apply to other forms of consumer debt and financial commitments.

This is one reason borrowing capacity is about much more than simply comparing income with the amount you want to borrow.

Why Interest Rates Can Change the Calculation

Interest rates can also influence borrowing capacity.

Home loan applications aren't generally assessed solely on whether a borrower could meet repayments at the advertised interest rate. Serviceability assessments typically include a buffer to consider whether repayments could still be managed if rates were higher.

As interest rates and assessment settings change, the amount someone may qualify to borrow can therefore change too, even when their income hasn't.

It helps explain why an online borrowing calculator should generally be treated as an estimate rather than a guaranteed borrowing amount.

Rate Money's home loan calculators can provide a useful starting point for exploring different scenarios.

Why Self-Employed Income Adds Another Layer

For PAYG employees, demonstrating income can often be relatively straightforward.

For someone who is self-employed, the financial picture can be more complex.

Income may come through a company, trust or sole trader structure. Revenue may fluctuate throughout the year. Business expenses, liabilities and retained earnings can also form part of the broader financial picture.

Different assessment policies may also treat self-employed income and supporting documentation differently.

That's why two people earning what appears to be a similar amount on paper can potentially receive different borrowing outcomes.

It isn't simply a question of "How much do you earn?"

It's about how the complete financial position is assessed.

Different Assessments Can Produce Different Outcomes

Another important point is that borrowing capacity isn't necessarily calculated exactly the same way in every situation.

Policies around expenses, liabilities, income and self-employed applicants can vary.

This is particularly relevant for business owners whose finances don't always fit neatly into a standard PAYG income model.

Understanding your borrowing position before searching for property can provide a clearer picture of what may be possible and what information may be required when you apply.

At Rate Money Fairfield, Chris and the team specialise in working with self-employed Australians and take the time to understand the complete financial picture.

If you're considering buying, investing or making your next property move, talk to the Rate Money Fairfield Home Loan Specialists about the home loan options that may be available for your circumstances.