I've been asked a lot of questions recently about how different types of income/expenses change people's borrowing power. I'm sure other brokers on SS are asked about this too. Some general rules that I like to use are below. Hopefully it's of some use to the SS community.
When applying for a new loan, banks generally will calculate your overall income and ensure it's higher than your overall 'assessed' expenses. The banks assess the new debt (loosely speaking) you take on at an interest rate of around 7-8% at P&I repayments.
How different types of income/expenses are treated generally depends on a number of factors, including:
(a) the type of income/expense it is;
(b) which lender you look at, they treat different types of income/expenses differently;
(c) how much you're borrowing (the P&I repayment would be higher);
(d) tax rate used;
(e) the banks assessment rate (the 'buffer') that they use to check whether you can service the new loan;
(f) other factors (do you have existing debt with them, interest rate changes, APRA changes, etc).
Given the array of factors, the most common answer given to questions about income/expense changes is that it depends. However, below are some 'quick back of the envelope' guidelines that you can use as rough guidelines to think about it.
Salary/Business: Increase the average income earners salary by $1, will increase your borrowing power by $7.
For the average income earner (34-38% tax rate), increasing your gross income by $10,000 will increase your borrowing power by around $70,000. This will fall for higher income earners, as they will pay a higher marginal tax rate. Given salary rises are infinite, this is the most powerful way to increase your borrowing power long term.
Rental: For the average income earner, a $1 increase in rental income will increase your borrowing power by $5.5.
Can only include 80% of rental income generally. Therefore it's a bit lower than salary increases.
Discretionary expenses (e.g. rent, PPOR expense, foxtel, etc): Increasing your expenses by $1 will decrease your borrowing power by $12.
Given this comes out of net income, it has more of an effect than gross salary increases. Its why all those articles talk about reducing bad debts, etc.
Credit card limits: Increasing your limit by $1, will reduce your borrowing power by $5.
Credit card limits are generally assessed at 36% p.a. of the credit limit (regardless of whether you use it or not). Therefore a $10,000 limit reduces your borrowing power by $3,600 p.a. This is equivalent to about $50,000 in borrowing power.
These aren't anything but quick guidelines, if you want more specific responses your best talking to your broker. The actual amounts will vary from the above depending on the range of factors I've mentioned (and others) above.
I'm sure others can add some colour/have different general rules.
Cheers,
Redom
When applying for a new loan, banks generally will calculate your overall income and ensure it's higher than your overall 'assessed' expenses. The banks assess the new debt (loosely speaking) you take on at an interest rate of around 7-8% at P&I repayments.
How different types of income/expenses are treated generally depends on a number of factors, including:
(a) the type of income/expense it is;
(b) which lender you look at, they treat different types of income/expenses differently;
(c) how much you're borrowing (the P&I repayment would be higher);
(d) tax rate used;
(e) the banks assessment rate (the 'buffer') that they use to check whether you can service the new loan;
(f) other factors (do you have existing debt with them, interest rate changes, APRA changes, etc).
Given the array of factors, the most common answer given to questions about income/expense changes is that it depends. However, below are some 'quick back of the envelope' guidelines that you can use as rough guidelines to think about it.
Salary/Business: Increase the average income earners salary by $1, will increase your borrowing power by $7.
For the average income earner (34-38% tax rate), increasing your gross income by $10,000 will increase your borrowing power by around $70,000. This will fall for higher income earners, as they will pay a higher marginal tax rate. Given salary rises are infinite, this is the most powerful way to increase your borrowing power long term.
Rental: For the average income earner, a $1 increase in rental income will increase your borrowing power by $5.5.
Can only include 80% of rental income generally. Therefore it's a bit lower than salary increases.
Discretionary expenses (e.g. rent, PPOR expense, foxtel, etc): Increasing your expenses by $1 will decrease your borrowing power by $12.
Given this comes out of net income, it has more of an effect than gross salary increases. Its why all those articles talk about reducing bad debts, etc.
Credit card limits: Increasing your limit by $1, will reduce your borrowing power by $5.
Credit card limits are generally assessed at 36% p.a. of the credit limit (regardless of whether you use it or not). Therefore a $10,000 limit reduces your borrowing power by $3,600 p.a. This is equivalent to about $50,000 in borrowing power.
These aren't anything but quick guidelines, if you want more specific responses your best talking to your broker. The actual amounts will vary from the above depending on the range of factors I've mentioned (and others) above.
I'm sure others can add some colour/have different general rules.
Cheers,
Redom