Understanding your borrowing capacity is crucial when you're looking at buying a home. For Australian Defence Force members, knowing how much you can borrow helps you target the right properties and access home loan options from banks and lenders across Australia that align with your financial situation.
What is borrowing capacity?
Borrowing capacity refers to the maximum loan amount a lender will approve based on your income, expenses, and financial commitments. This figure determines how much property you can afford and influences your entire home buying journey.
Lenders assess several factors when calculating your borrowing capacity:
• Your gross annual income (including allowances and overtime for Defence members)
• Monthly expenses and living costs
• Existing debts and financial commitments
• Employment stability and history
• Credit score and history
• Deposit amount available
How Defence Force income affects your application
As a current or former Australian Defence Force member, you have unique income streams that civilian lenders might not fully understand. Military allowances, overseas service pay, and Defence housing benefits can significantly boost your borrowing capacity when properly presented in your home loan application.
Many lenders don't recognise the stability of Defence Force employment or understand how to assess military-specific income. This is where specialist knowledge becomes valuable in the application process.
Key factors that impact your borrowing power
Loan to value ratio (LVR)
Your LVR represents the loan amount as a percentage of the property's value. A lower LVR typically means avoiding lenders mortgage insurance (LMI) and accessing better interest rate discounts. Most lenders prefer an LVR of 80% or less, though Defence members may have access to special LVR arrangements.
Interest rates and repayment calculations
When calculating home loan repayments, lenders consider both variable interest rate and fixed interest rate scenarios. They assess your ability to service the loan if rates increase, using a buffer rate above current home loan interest rates.
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Debt-to-income ratio
Lenders examine your total monthly debt repayments against your income. Credit cards, personal loans, and other commitments reduce your available borrowing capacity. Paying down existing debts before applying for a home loan can improve your position.
Strategies to maximise your borrowing capacity
Improve your deposit position
A larger deposit reduces your LVR and can help you avoid LMI costs. Consider your home equity from previous properties or family assistance options available to Defence personnel.
Optimise your financial documentation
Ensure your banks statements clearly show your income patterns and maintain consistent savings habits. Lenders want to see financial discipline and the ability to manage money responsibly.
Consider your loan structure options
Different home loan options can affect your borrowing capacity. An offset account can demonstrate your ability to maintain higher balances while providing tax advantages. Variable home loan rates might offer more flexibility, while a fixed interest rate home loan provides certainty for budgeting.
The pre-approval advantage
Getting home loan pre-approval gives you confidence when house hunting and demonstrates serious intent to vendors. The streamlined application process for pre-approval also highlights any issues with your borrowing capacity before you find your ideal property.
Pre-approval considers current property market conditions and home loan rates, giving you a realistic budget range. This prevents disappointment and helps you focus on properties within your financial reach.
Understanding additional costs
Remember that borrowing capacity isn't just about the loan amount. Factor in:
• Stamp duty (varies by state and property value)
• Legal and conveyancing fees
• Building and pest inspections
• Moving costs and immediate property improvements
• Ongoing costs like council rates and insurance
These expenses don't directly affect your borrowing capacity calculation but impact your overall budget and deposit requirements.
Moving forward with confidence
Understanding your borrowing capacity empowers you to make informed decisions about your property purchase. Whether you're considering variable interest rate options or fixed interest rate home loan products, knowing your limits helps you negotiate from a position of strength.
Defence members often have unique financial circumstances that require specialist understanding. Working with brokers who understand military pay structures, deployment patterns, and Defence-specific benefits ensures your borrowing capacity assessment reflects your true financial position.
Call one of our team or book an appointment at a time that works for you to discuss how we can help maximise your borrowing capacity and access the most suitable home loan options for your circumstances.
