What Exactly Is Borrowing Capacity?
Borrowing capacity is the maximum loan amount a lender will approve based on your financial situation. For plumbers, this calculation can be more complex than for traditional employees due to irregular income patterns and the nature of trade work.
Lenders look at several factors when determining your borrowing capacity:
• Your income (including overtime, allowances, and regular subcontractor earnings)
• Monthly expenses and living costs
• Existing debts and financial commitments
• Credit history and score
• Employment stability
• The property's loan to value ratio (LVR)
How Your Income as a Plumber Affects Your Application
As a tradesperson, your income structure might include base wages, overtime, allowances, and potentially income from your own plumbing business. Home Finance & Mortgage Brokers who specialise in trades understand these income patterns better than mainstream lenders.
When applying for a home loan, you'll typically need to provide:
- Recent bank statements (usually 3-6 months)
- Tax returns and financial statements
- Employment contracts or ABN documentation
- Proof of allowances and overtime patterns
Many lenders require two years of consistent income history, but specialist mortgage brokers can access Home Loan options from banks and lenders across Australia who are more flexible with tradies' income assessment.
Calculating Home Loan Repayments and Interest Rates
Understanding how calculating home loan repayments works helps you plan your property purchase. Your monthly repayments depend on:
• The loan amount you borrow
• Your home loan interest rate (variable or fixed)
• The loan term (typically 25-30 years)
You can choose between a fixed interest rate home loan, which locks in your rate for a set period, or variable home loan rates that fluctuate with market conditions. Many plumbers opt for a combination of both to balance certainty with flexibility.
Maximising Your Borrowing Power
To improve your borrowing capacity:
Document Everything: Keep detailed records of all income sources, including regular overtime and allowances. Consistent bank statements showing regular deposits strengthen your application.
Reduce Existing Debts: Pay down credit cards, personal loans, and other commitments. Lenders assess your debt-to-income ratio when determining how much you can borrow.
Save a Larger Deposit: While you can buy a home with as little as 5% deposit, you'll need to pay lenders mortgage insurance (LMI). A 20% deposit eliminates LMI and may qualify you for interest rate discounts.
Consider an Offset Account: This can reduce interest paid over the loan term and demonstrate your ability to manage finances effectively.
The Application Process for Tradies
The Home Loan application process through specialist brokers often involves a more streamlined application process tailored to trades workers. Here's what typically happens:
- Initial assessment of your financial situation
- Get pre-approved to understand your borrowing limit
- Property search within your approved range
- Formal Home Loan application submission
- Property valuation and final approval
- Settlement and moving into your new home
Home Loan pre-approval gives you confidence when buying a home, especially in a dynamic property market. It shows sellers you're a serious buyer and helps you move quickly when you find the right property.
Understanding LVR and Its Impact
The loan to value ratio (LVR) is crucial in determining your borrowing capacity and loan conditions. It's calculated by dividing your loan amount by the property's value. For example, borrowing $400,000 for a $500,000 property gives you an 80% LVR.
Lower LVRs typically result in:
• Better interest rates
• More Home Loan options
• No requirement for LMI (under 80% LVR)
• Access to features like offset accounts
Building Home Equity Over Time
As you pay down your mortgage and your property potentially increases in value, you build home equity. This equity can be valuable for future property investments, renovations, or business expansion opportunities.
Additional Costs to Consider
When determining how much you can borrow, factor in additional costs like:
• Stamp duty (varies by state)
• Legal and conveyancing fees
• Building and pest inspections
• Moving costs
• Ongoing property maintenance
These costs don't increase your borrowing capacity but affect how much property you can realistically afford.
Working with mortgage brokers who understand the trades industry means you'll access specialist Home Loan Rates and products designed for your circumstances. They can help you apply for a home loan through lenders who recognise the stability and earning potential of skilled tradespersons like plumbers.
