How Banks Decide How Much You Can Borrow
When you apply for a home loan, banks will assess you on a number of different things to work out how much they will lend you.
But what information do they use in deciding the final loan amount? Here is a little bit of insight into the analysis that banks do when they calculate your borrowing power. If is not every factor that a bank will consider but it is a good general guide to consider when starting to look for your next home loan.
How much deposit do you have?
If you want to increase the amount of money banks will lend you, then having some savings behind you is important. A bigger deposit amount can be just as important as a good salary to pay the monthly installments. So it means that even if you have a high salary, if you do not have all that much of a deposit, it will limit you.
Not all income is equal
It is important to know that there are different standards applied to different types of income. For example, income earned from a full time job will be more favourable than income earned on a casual or contracting basis. Also, a self-employed person will have more trouble proving their income compared to a person who earns the same amount of money as an employee. That said, a higher income will help when determining the maximum loan amount you can lend.
Do you have a credit card?
You don’t have to rack up a lot of debt on a credit card for it to penalise you and your borrowing power. Banks will be cautious when it comes to credit cards and may assume that you could spend up to your credit card limit at any time. So if you have a credit card with a P50,000 limit, banks will view that as if you had P50,000 of credit card debt. This is because it is like a liability that you have and could spend at any time.
It is important to take the time to really look at what your day-to-day expenses are because you want to have a home loan that really helps you get into a better financial position – not a stressful one. So banks will look into what your expenses are to determine if you can afford the extra cost of monthly loan installments.
Can you afford a higher interest rate?
When banks do the numbers on you, they do them on a higher interest rate than is currently available to see you can still afford to make the repayments. Rates can change, and they will most likely change a lot over the term of a long loan period. So banks may use a sample interest rate that could be much higher than the current rate. For example, if current interest rates are approximately 6%, the bank may do their calculations on about 8% or 9% to make sure you can still afford the monthly repayments.