07 Sep 2021

What Does Borrowing Capacity Mean?

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A lender determines every applicant’s borrowing capacity. The capacity becomes the amount that they’re willing to lend to a homebuyer. Lenders use several tools to reach the capacity of a borrower. We provide an overview of the process.

Lenders use your income as a starting point for determining borrowing capacity. However, income doesn’t show the whole picture. It’s important to subtract monthly expenses from monthly gross income. A positive amount goes in your favour, Plus, it’s best if the difference is at least two times your monthly gross income.

Next, lenders explore your credit history. It helps them gauge your financial responsibility. A high income doesn’t denote fiscal savviness. After all, lottery winners often end up broke despite gaining millions.

Now it’s time to look at the deposit. The higher the deposit, the higher your borrowing capacity. A deposit equals skin in the game. A 20% deposit equals at least $100,000 in many cases. That’s not an amount homeowners are willing to lose if they experience financial hardship.

The final factor is the property. Properties in good neighbourhoods and appraised at fair market value can garner a higher borrowing capacity. The market plays a role too. In a buyer’s market, interest rates are favourable, so home loans become more affordable and less risky. Things shift when the market favours sellers.

Borrowing Capacity Conclusion

To determine your borrowing capacity, Mortgage House offers several online calculators, such as the car loan calculator. After trying it out, contact our loan specialists to discuss your mortgage options.

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