Why having a lot of equity doesn't mean you can borrow more.

It seems one of the hardest things to understand as a consumer, why your maximum loan amount has relatively nothing to do with the equity you have.

"Why cant I borrow more, I have loads of equity", in lending it sounds like which of these apples is more lemony? The two things are entirely unrelated.

And yet I see where you are coming from - you figure there's no way you won't make your repayments because you have too much to lose, and even if you did the bank wouldn't be out of pocket. I hear you. I get it.

But none of that means you can *actually* afford your repayments. It doesn't say where the money is coming from to make them and it doesn't say that the repayments won't put you into hardship.

Affordability (can you actually meet the repayments without discomfort) is one question - equity (the bit you own) is a different thing.

The absolute tone of 2017 (and it isn't going to change) is lenders having to meet increasingly stringent criteria around proving you can actually afford the loan you are being offered.

Did you know that most lenders test your affordability allowing for significant rate rises? Last year most of these buffer or reference rates were increased to 7%+, in cases they're using 8% as a test!

To give you a very quick summary, the lender takes:

  • Your gross (pretax) income from all acceptable sources

  • deducts your ta