Most lenders use the same basic formula when calculating your borrowing power. However, there can be a lot of variation in the way they assess your expenses, with some lenders requiring adding a buffer that seriously impacts the final amount you’re eligible to borrow.
To manage the variations in TaxTank we have built an interactive property borrowing power calculator to show both your Net Income Surplus and your Net Surplus Ratio right on the property tank dashboard.
Firstly lets explain the difference between Net Income Surplus and Net Surplus Ratio.
Net Income Surplus
Your net income surplus is the amount of cash you have left over after paying for your current and proposed loan obligations and living expenses. Whilst not necessarily a deciding factor when applying for a loan it is certainly helpful to know when making financial decisions, like considering the purchase of a new property or vehicle. The formula used in TaxTank is:
Net Income Surplus = (Net monthly rent (existing properties) + Net monthly rent (proposed properties) + Net wages/bonuses + Spouse net wage) - (Monthly loan repayments (existing) + Monthly loan repayments (new property) + Other liability repayments + Living
Net Surplus Ratio
Your net income surplus ratio (or interest cover ratio) is the amount of left over income equal to the amount required to pay off the interest on a loan. In other words, your surplus income to cover your debt obligations. Lenders usually require a minimum ratio of 1% to 1.25% depending upon their assessment criteria. The formula used in TaxTank is:
NSR % = (Net monthly rent (existing properties) + Net monthly rent (proposed properties) + Net wages/bonuses + Spouse net wage + Living expenses) / (Monthly loan repayments (existing) + Monthly loan repayments (new property) + Other liability
Buffers in a serviceability assessment
It's important to note that when calculating your net surplus ratio lenders will use a buffer on the interest rate. For example, if you were taking a home loan at say 4%, then most lenders will assess this loan for you at 2.5% above the rate you are being offered. Hence your loan will be assessed at 6.5% to ensure you can afford your loan repayments at a higher rate in the case of an interest rate rise.
Want to learn more about how to use the borrowing power report? Check out the related article How to use the Property Borrowing Power Calculator in TaxTank