The loan process equation (or, how much can I borrow?)

Friday 14 January, 2022

When applying for a loan, you’ll hear terms such as “borrowing power”, “borrowing capacity”, and “assessment rate”. But how do they relate? What do they mean? We’ll break it down for you in a simple equation.

The loan process equation:

Your current financial situation + assessment rate = Borrowing power

Borrowing power > loan amount = Loan approval!

Simply put, when you apply for a loan – the lender will use an assessment rate of your current financial situation to determine your borrowing power.

The lender will decide whether to approve your loan based on their findings in this process.

What’s my financial situation?

Your financial situation is assessed the following criteria:

  • Your current income
  • The number of dependants within your household and your marital status
  • Your monthly general living expenses
  • Your existing loans and credit cards – the current balance/limit, and the minimum monthly repayment amount

What’s an assessment rate?

The assessment rate is the level of risk that a lender is willing to assume if they provide you with a loan.

The lender will consider the amount you want to borrow and assess whether you can realistically achieve that in your current circumstances.

What is borrowing power?

Borrowing power, or borrowing capacity, is the amount of money that a lender will allow you to borrow. This is based on your current financial situation and the lender’s assessment rate.

What about business loans?

The same principle applies. The lender will assess your current financial situation and assessment rate to determine your borrowing power.

For business loans, lenders will determine your financial situation by assessing criteria such as:

  • Your business annual net profit before tax
  • Interest paid on existing loans, leasing costs (such as vehicles and equipment), depreciation, personal wages paid to all owners, voluntary superannuation contributed
  • Income from other sources (e.g. PAYG)
  • Tax paid on total available annual income
  • Your existing business loans, credit cards, lease repayments, existing personal living expenses for all business owners, and combined personal living expenses for all business owners

You’ll also be expected to supply plans, specifications, council approvals and fixed price building contracts.

Where do finance brokers come into this equation?

Different lenders have different assessment rates, so some are more willing to take on more risk for a loan than others.

Finance brokers are helpful in this process, as we act as your liaison between lenders and you. With our vast experience in finance and established connections, we can help you find a lender who is favourable to your situation.

So, let’s rewrite this equation for you:

Finance Brokers Tasmania = Loan approval!*

Chat to us today!

*Not guaranteed.

You might also like...

Finance Brokers Tas Campaign 2 7016px 300dpi 68

Redraw vs Home Loan Offset Account

When you take out a home loan there are a few options you can choose to make repayments more manageable. However, choosing a financial institution and interest rates aren't the only things you need to consider. It’s also important to look for eligible home loan options which can reduce your interest repayments and give you flexibility to pay off your home loan sooner.

Fbt hobart

Get into your first home sooner with a parental guarantee!

Buying a house is likely the biggest investment you will ever make. Over the last three years, Tasmania has seen record rises in real estate prices meaning saving for a deposit to get your start in the property market is no small task. Recently released statistics show that almost 60% of first home buyers rely on help from the 'bank of mum and dad' when buying their first home.

Finance Brokers Tasmania Jake Birtwhistle10

Refinancing to Make The Most from the Equity in Your Home

Refinancing your home loan could be a value saving option if you're looking to access additional funds. With housing prices rising so dramatically over the last couple of years, existing homeowners have the opportunity to access the equity in their home to spend on things like home improvements, debt consolidation, buying a new car or another large ticket item such as a caravan or motorbike. You could even help your child break into the housing market!

Finance Brokers Tasmania Gary Watson

Is a Reverse Mortgage a Good Idea to Help in Retirement

A reverse mortgage is similar to a home loan but without the need to make regular payments. It gives people living on a pension or fixed income the ability to draw on part of the equity in their home; enabling them to live more comfortably.