Maximum Borrowing Capacity Calculator

Maximum Capacity Formula:

\[ \text{Max Capacity} = \frac{\text{Income} \times (1 - \text{DSR})}{\text{Servicing Rate}} \]

Maximum Capacity:

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1. What is Maximum Borrowing Capacity?

Maximum Borrowing Capacity is the maximum amount an individual or business can borrow based on their income, existing debt obligations, and the servicing rate required by lenders. It helps determine affordable borrowing limits while maintaining financial stability.

2. How Does the Calculator Work?

The calculator uses the Maximum Capacity formula:

\[ \text{Max Capacity} = \frac{\text{Income} \times (1 - \text{DSR})}{\text{Servicing Rate}} \]

Where:

\( \text{Income} \) — Total monthly or annual income (currency)
\( \text{DSR} \) — Debt Servicing Ratio (decimal between 0-1)
\( \text{Servicing Rate} \) — Required debt servicing rate (decimal between 0-1)

Explanation: The formula calculates how much additional borrowing is possible after accounting for existing debt payments and the lender's required servicing rate.

3. Importance of Maximum Borrowing Capacity Calculation

Details: Calculating maximum borrowing capacity is essential for responsible financial planning, loan applications, and avoiding over-indebtedness. It helps individuals and businesses understand their borrowing limits while maintaining healthy debt-to-income ratios.

4. Using the Calculator

Tips: Enter income in your local currency, DSR as a decimal (e.g., 0.35 for 35%), and servicing rate as a decimal. All values must be valid (income > 0, DSR between 0-1, servicing rate between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: What is Debt Servicing Ratio (DSR)?
A: DSR is the percentage of income used to service existing debt obligations. It's calculated as total debt payments divided by total income.

Q2: What is a typical servicing rate used by lenders?
A: Most lenders use servicing rates between 0.25-0.35 (25%-35%), but this can vary based on credit risk, loan type, and economic conditions.

Q3: How often should I calculate my maximum borrowing capacity?
A: It's recommended to recalculate whenever your income changes significantly, you take on new debt, or when considering new borrowing.

Q4: Does this calculation consider interest rates?
A: The servicing rate parameter indirectly accounts for interest rates, as lenders typically set servicing rates based on current interest environments.

Q5: Can this calculator be used for business loans?
A: Yes, the same principle applies to business borrowing, though business lenders may use different servicing rate thresholds.