Working out how much you can borrow for a mortgage can be a complex beast. Each of the banks may have slightly different ways in which they calculate your ability to service the loan and the level of risk they’re willing to accept.
The best way to know your exact borrowing power (also known as borrowing capacity i.e. how much you can borrow from the bank) is to talk to a lender or an NZHL Mortgage Mentor.
But if you’d like to learn how to increase your borrowing power and set yourself up for success, here’s how.
At the heart of it, your mortgage borrowing power comes down to two main areas: The size of your deposit and your ability to service the mortgage repayments.
Let’s break these down.
What affects your borrowing power
Size of your deposit
It goes without saying that the bigger your deposit, the better. In many cases, lenders will want a deposit that’s at least 20% of the home’s purchase price.
If this sounds a bit overwhelming, don’t worry. It is still possible to get a mortgage with less than 20% deposit, but because this is higher risk for the bank, you may be subject to higher interest rates or may have to pay a Low Equity Premium or similar.
Ability to service the repayments
Secondly, your ability to make the repayments comes into play. It’s all very well if you have a healthy deposit, but if you can’t pay your ongoing repayments, that’s going to be a problem.
Your income and fixed expenses are of course the largest factor in your ability to pay. Whether you’re purchasing a home by yourself or with others, your combined income and expenses will be examined by the lender, so it’s important to be transparent about these.
But it’s not just your income that lenders consider when deciding whether to accept your loan application and how much they are willing to lend they look at other factors such as:
- Whether you have any children or dependents
- Existing debt – e.g. credit cards, finance on a car, or other loans
- Your credit report. If you’ve had a debt collector at your door in the past few years, this may impact your credit score.
Interest rates
Next up are our good friends: interest rates. These certainly affect your ability to pay the mortgage and therefore your borrowing power. When a lender is examining your loan application, they may “stress test” your ability to pay higher interest rates than what are currently on offer. This enables them to foresee any problems that may come down the line if interest rates increase.
Loan terms
A longer loan term (e.g. 30 years) may reduce the amount you pay at each repayment, supporting affordability, but it also means you’ll pay more interest over time. There are pros and cons to having shorter and longer loan terms, so make sure you chat with your lender or a NZHL Mortgage Mentor to discuss what is best for you.
How to estimate your borrowing power
A great way to get an idea of how much you may be able to borrow is by using an online calculator. Try our borrowing calculator to get an estimate of your borrowing power.
Next, our repayment calculator gives you a gauge of how much you’ll need to pay back each month.
Keep in mind that while using online calculators are a useful way to get an approximate idea of how much you can borrow the number you see is not set in stone. The best way to get an accurate view is to talk to an NZHL Mortgage Mentor. They will consider all of your personal and unique circumstances to get a more precise view of your borrowing power.
How to increase your borrowing power
So, we’ve talked about what lenders look for when it comes to working out how much you can borrow for a mortgage, and how to estimate your borrowing power and repayments. If you’re feeling nervous, all is not lost! Here are some ways you could help increase your borrowing power and make your application more attractive to the lender.
Build your deposit
Aiming for a 20% deposit is a great way to start. Bear in mind that your deposit could be made up of several different things, such as:
- Your savings
- Your KiwiSaver (first home buyer withdrawal)
- Gifted deposit (money towards your deposit gifted usually by family)
- Inheritance
If you already own a property, you may be able to use the equity from other properties to help fund the new one.
Review your income
Reviewing your income from all sources is key to increasing your borrowing power. This could include your job salary, dividends from investments, income from secondary jobs, or side hustles.
In an ideal world, your repayments should be no more than 30-40% of your total income. Have you tried seeing how this stacks up using the repayment calculator?
If it doesn’t stack up, think: are there ways you could increase your income? For example:
- Are you able to increase your value to your employer and ask for a pay rise? In fact, when was the last time you had a pay review? (If it’s been more than a year, it’s time to book a chat with your manager!).
- If not, are you in a position to look for a new higher-paying job?
- Do you have skills in which you can start a side hustle or freelance? Could you offer tutoring in these skills instead?
- Have you considered getting a flatmate (or two)? The lenders will view these as an income source, but it may become a condition of your loan approval.
Review your expenses
Next up, do a review of your expenses. If you can review the last 3 months’ worth, even better.
You’ll need to analyse your fixed expenses and your discretionary spending.
When it comes to fixed expenses, make sure to review your utilities. Are the rates you’re getting from your phone, power, and internet companies competitive? If not, shop around for cheaper options.
Arguably, it can be harder to cut back discretionary spending and unnecessary expenses – but this is key to increasing your borrowing power.
Discretionary spending is stuff we want to buy rather than need – facials, new clothes, cinema visits, the newest gaming console, restaurant dinners, and even holidays.
Yes, there may be a sacrifice. But is it worth it to be able to get into your first home?
Before ordering Uber Eats or buying new shoes, consider. Do you truly need it?
It’s also a great idea to review your subscriptions. They’re very easy to forget but can add up! Take account of your streaming subscriptions, software, website subscriptions, or magazine subscriptions. Which are you using, and do you need them all?
Illustrate your ability to save
Cutting back on expenses and increasing your surplus helps to demonstrate a good savings history. Lenders love to see you have a good track record of keeping money rather than spending every paycheck, so make sure to have a savings account and regularly put money into it.
Consider your employment status
As we’ve mentioned, it’s important to show a consistent income to prove your ability to service (pay) the mortgage.
A full-time permanent role with a regular salary looks more stable to a lender than a contractor who moves from contract to contract throughout the year.
Business owners will need to show the lender three years of consistent income – they will ask for records of your financial accounts to prove this.
Reduce your existing debt
Reducing your existing debt is instrumental to increasing your borrowing power – including credit cards, finance on cars, student loans, or other personal loans.
Paying these off first (or as much as possible) before applying for a mortgage can also affect how much you can borrow. Reducing your credit card limits or closing credit cards that you don’t use can also help.
Increase or maintain a good credit score
Your credit score ranges from 0 to 1000 and represents your ability to pay back loans or bills on time. The higher the number, the better! Late loan repayments, missed credit card payments, or power bills may be reflected in the score.
Lenders look at your credit score as a factor to gauge your ability to pay back a home loan – a lower score can result in higher interest rates.
To help maintain a healthy credit score, pay off any credit cards or other loan repayments on time and in full, every month. Setting up automatic payments can help with this.
Following all the above steps can influence your ability to borrow, and how much you can borrow, for a mortgage. It’s all about planning ahead and setting yourself up for success.
If you have any questions about home loans or how much you may be able to borrow, book a free chat with one of our NZHL Mortgage Mentors.
Your Mentor will work with you to tailor a plan suited to your unique circumstances and personal goals. Then, if and when you’re ready, they’ll help you through the mortgage application process (and beyond). We’re here to help make the process as straightforward and stress-free as possible.