From time to time I hear people say things like “I am paying $450 per week rent and because interest rates are so low at the moment, the repayments on a $390,000 home loan are about $445 per week. So I can afford it. But the banks say I can’t. It doesn’t make sense.”

When banks work out whether you can afford a loan or not they don’t base the repayments on the actual rate you borrow the money at – which is 4.3% in the example above.

They build a buffer into their calculations to make sure you can still afford the loan when rates eventually start to go up again. They load up the interest rate to 7.5% or more and use the repayments at that rate in their affordability test. In the above example that would be $630 per week compared with the actual weekly repayments of $445.

It makes sense that banks don’t want to put people into loans that become unaffordable down the track but it’s not pleasant to miss out on a loan when you think you have qualified.

So, to find out your real borrowing power and avoid being knocked back by a bank, call Paul on 0403344127.