Why your borrowing capacity can change even if your income hasn’t

It’s been a while since you last had a salary increase, so the amount you could borrow as a home loan is the same as last time you checked, right?

Wrong.

Your salary is only one of the factors that can affect your borrowing capacity. There are many others, relating to changes in the economic and regulatory environment, adjustments in lenders’ loan assessment criteria, and changes in your personal financial circumstances unconnected to your earnings.

Here are some of the main reasons your borrowing power can change.

Interest rate changes
This is the big one you may already be aware of. When the Reserve Bank increases or lowers the official cash rate, banks pass on all or most of the change to consumers. This affects the interest rates on offer for new loans. Though your salary is unchanged, an interest rate increase reduces the loan amount you could comfortably service, while a rate decrease means you would be able to service a larger mortgage.

Loan serviceability buffers
The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) enforce strict limits on how much banks and other credit providers can lend, in order to ensure borrowers can comfortably manage their debts. This currently includes a 3% minimum serviceability buffer – that is, a contingency for future interest rate rises – to be applied above the mortgage interest rate being offered.

Additionally, there’s a debt-to-income ratio cap, and a requirement that lenders make enquiries into both your income and expenses, including using either your declared living expenses or the Household Expenditure Measure (HEM) benchmark, whichever is greater.

But government regulators or lenders themselves could increase this buffer, resulting in a fall in your borrowing capacity. Conversely, a reduction in the buffer may increase the amount you can borrow.

Lender policy changes
As well as responding to regulatory changes, banks also regularly review their own lending policies around the treatment of overtime, bonuses or commission income, assessment of rental income and guidelines on investment properties or interest-only loans. This can affect your borrowing capacity even if your salary and the lender’s interest rates are unchanged.

Your existing debts
Credit cards, personal loans, car finance and Buy Now Pay Later accounts all reduce the income available to service a mortgage. A credit card with a high limit, even if you don’t use it, can reduce your borrowing capacity because lenders may assume that you could draw on that limit in full.

Changes in your household expenses
If your living expenses have increased significantly since your last loan assessment – perhaps as a result of childcare costs, school fees or new insurance policies – you could find that the loan amount you are offered has gone down.

Altered family circumstances, such as a new child or taking financial responsibility for other dependants, can also affect the amount a lender is willing to approve.

Get help to review your borrowing capacity
Lending rules, interest rates and credit policies can change regularly, making a borrowing estimate from even six or twelve months ago no longer accurate. Contact your financial adviser to help you understand the factors that affect your borrowing capacity, and to get a broad idea of what size mortgage you are likely to be offered. They can put you in touch with a mortgage broker who can provide an accurate assessment by comparing the lending policies of multiple credit providers and identifying those whose criteria best suit your financial circumstances, potentially increasing your borrowing options without any change in your income.

McConachie Stedman Financial Planning Pty Ltd is a Corporate Authorised Representative of MCS Financial Planning Pty Ltd | ABN 11 677 710 600 | AFSL 560040

General Advice Warning
The information provided in this article is for general information purposes only and is not intended to and does not constitute formal taxation, financial or accounting advice. McConachie Stedman does not give any guarantee, warranty or make any representation that the information is fit for a particular purpose. As such, you should not make any investment or other financial decision in reliance upon the information set out in this correspondence and should seek professional advice on the financial, legal and taxation implications before making any such decisions.