What Does Borrowing Power Mean?

Have you ever heard someone ask, 'How much can I borrow?'

A friend might have asked, or you might have even pondered it yourself.

The answer comes down to borrowing power.

Here’s a general guide to what borrowing power means, how it’s calculated and how you might be able to improve yours.

What is Borrowing Power?

Generally speaking, borrowing power is the maximum amount that a lender is willing to lend to you, based on your financial situation.

We talk about borrowing power in terms of home loans, car loans, personal loans and other forms of credit like credit cards.

It’s not the same as the amount that you might be approved for, but having a good understanding of borrowing power can help you set realistic expectations before you apply for a loan.

How Do Lenders Calculate Borrowing Power in NZ?

There are a few things that lenders will consider when they are determining someone’s potential borrowing power.

Income

This takes in your annual salary, wages, any business income, rental income or benefits that you receive.

Expenses

This includes your financial commitments and what you spend on your living costs, including childcare, insurance and utility bills. 

Other debts

Lenders will also consider your other lending, including credit cards, car loans, any buy now pay later debt and student loan commitments. If you have an investment property loan or an existing home loan, it will be included in your total costs.

Credit score and history

Most lenders will also look at your credit score and your history when assessing you.

Borrowing Power Across Different Loan Types

There are a few ways that the type of loan you’re looking at might affect your borrowing power, assuming you have the disposable income to service each of them.

Car loans

Car loans typically have relatively short terms, particularly compared to home loans, but if they’re secured, it can boost your borrowing power. For strategies on paying off your car loan faster, consider these expert tips.

Personal loans

If your loan is unsecured, your individual situation becomes even more important, and lenders can only rely on an assessment of your income and outgoings, and your credit history.

Mortgages

Home loans come with different rules again because banks have limits on things like how much they can lend compared to a household’s income and loan-to-value restrictions that limit the low-deposit lending they can do.

Why Borrowing Power Differs Between Lenders?

Lenders may not always assess people’s borrowing power in the same way. Learn more about personal loan myths.

Things that may make a difference include the type of lender you’re dealing with. Banks can be different from finance companies, which are also different to credit unions. Even within a category of lenders, appetite between lenders can vary.

Different credit risk models may also mean lenders assess borrowing capacity differently.

If you’re self-employed or have a job that pays variable income, you may find some lenders have more appetite to work with you than others. Sometimes, a higher interest rate can be applied to lending that is viewed as higher risk.

It might be helpful to use online calculators, such as better™’s, to help you work out what might be possible.

Tips to Improve Your Borrowing Power

There are ways that you might be able to improve your borrowing power before you make a loan application.

• Reduce existing debt before applying: If you have debt that you can pay off, this will probably give your borrowing power a boost.

• Pay down or close unused credit cards: Even if there’s nothing on your credit cards, the available limit can have an impact.

• Improve your credit score: Paying all your bills on time and not falling behind on anything can help boost your credit score.

• Increase income where possible: If you can take on a side hustle or a few more hours in your day job, you could improve your outlook.

• Save for a deposit: If you’re buying a car or house, having more of a deposit may increase your borrowing power.

Common Misconceptions About Borrowing Power

Don’t be caught out by these common lending myths.

“Borrowing power = what I should borrow”

You should only borrow an amount that works for your individual circumstances, financial situation and complete financial position. Just because you can, in theory, borrow more, doesn’t mean you have to, or even should.

“A higher borrowing power means I can afford it”

Before you make any lending decision, it’s important to check that you can comfortably service the principal and interest repayments. The loan term and interest rate charged may also affect the affordability. Your lender will ensure you can demonstrate that you can afford any loan you apply for, but only you know how repayments will work with your life, and you need to be comfortable with them, too.

“Pre-approval means I can definitely borrow that much.”

Preapproval gives you an idea of how much you might be able to borrow, but this can change when it comes to finalising the loan.

“All lenders will offer me the same amount”

Lenders will offer different amounts depending on their individual assessments of your application, loan amount, their credit criteria, appetite for the type of loan you want and other factors that are unique to their business.

Borrowing Power vs Affordability

It’s important to have a clear delineation in your mind between borrowing power and affordability.

While borrowing power is what a lender thinks you can borrow, affordability is what matters.

This determines the level of loan that fits into your budget, for your unique circumstances and with your lending appetite.

A lender might determine that you have demonstrated affordability for a $50,000 loan, but if you know you can only comfortably manage the repayments on $35,000  because of other commitments in your life, or other things that you know you want to spend money on, or even if the larger loan just makes you nervous, you should go for the smaller amount.

Frequently Asked Questions (FAQs)

• How is borrowing power different from a credit limit?

  Borrowing power is what a lender decides it is willing to lend to you overall. A credit limit refers to the amount that you are lent on a specific credit facility, such as a personal loan or credit card.

• Can I check my borrowing power without applying for a loan?

  There are online borrowing power calculators and repayment calculators, including better™’s, which might give you a general idea of your borrowing power without having to apply for a loan.

• Does my KiwiSaver balance count towards borrowing power?

  Your KiwiSaver balance is an asset that is used in lender calculations when your overall financial situation is being assessed. But it’s important to keep in mind that it is designed to be a long-term investment vehicle and cannot be used to make debt repayments or be used as security for lending.

• How much does my credit score affect borrowing capacity in NZ?

  If your credit score is poor, it may make it harder or more expensive to access lending. The better finance™ team can advise you if you have questions about this.

• Can two people combine their borrowing power for a joint loan?

  Yes, a joint application may give you more borrowing power because it means you combine your annual income and assets.

Want to talk?

If you’d like to talk about what lending might be possible for you, give the team at better finance™ a call. We’re lending experts and can help you with questions about new loans, existing loans or debt consolidation.