Can I get a mortgage five times my salary?

Depending on your income, expenses, and the property you want to buy, you may be able to get a mortgage one, five, or even ten times your salary.

But while your salary does play a major role in determining how much you can afford to borrow on a mortgage, it is not the only deciding factor. And just because you have a high income, that doesn’t mean you’ll be approved for a loan, let alone a mortgage greater than someone on a lower income.

How banks calculate how much you can borrow for a home loan

Your financial situation, especially your salary, plays a significant role in determining the size of a mortgage you may be approved for. But there’s more to a home loan approval than just income.

When you apply for a home loan, a bank will request you submit various types of information, including:

• Proof of income
• Any income-earning assets
• A list of expenses and ongoing costs (rent, utilities etc.)
• Any existing debts
• A credit report (not submitted by you - a hard inquiry will occur)

Lenders are legally required to ask for this information to assess whether you are able to secure a property with a deposit as well as afford mortgage repayments – including interest – for the life of a loan. This is also known as your borrowing power.

A home loan lender calculates your borrowing power to help determine how much you may be able to responsibly service in a mortgage. But the more expenses and debts you have, and a less-than-average credit score, may negate the power of a high income.

If you earn, say, $100,000 a year and are looking for a home loan of $500,000 (or five times your salary) you may assume your high income means you will be approved for this loan. But, if your ongoing expenses were also very high, you had existing debts like a car loan and overdue credit cards, and you had a poor credit score, the lender may discern that you cannot responsibly afford repayments.

So, while your salary may give a fair indication of how much you may be approved for with a mortgage, having less-than-stellar personal finances may put you at a disadvantage.

Affording rent doesn’t mean you can afford a mortgage

It’s worth keeping in mind that just because you can afford to pay your rent right now, does not mean a lender will approve you for a mortgage with similar repayment costs. This is because banks calculate how much you can borrow for a home loan by testing your personal finances against its serviceability floor rate.

Because you will be charged interest on your mortgage, the banks need to account for affordability with future rate fluctuations. Even if rates are currently at record lows, they may not be for the next 20-30 years of a mortgage.

The lender assesses your ability to afford a loan at either 2.5% more than its current ongoing interest rate, or the floor rate set by the lender, whichever is higher. Currently, Australia’s biggest bank, CBA, has its serviceability floor set at 5.25%.

So, while interest rates are currently low, and you are on a steady income and can afford a certain amount in rent right now, the lender will be testing your ability to meet mortgage repayments at a higher interest rate for the life of a loan.

Calculating your borrowing power

Now that you have a better understanding of how your salary, as well as your expenses and credit score, help determine how much you can borrow, it’s time to discover your borrowing power.

Hop on RateCity’s Borrowing Power Calculator and enter some of the information mentioned above. This calculator acts as a similar assessment tool to what a bank may use. You’ll describe your situation (single or joint loan, number of dependents), input your earnings, as well as your expenses. The calculations will display an estimate of how much you may be able to afford as a total loan amount. You’ll see a range from a conservative estimate to a higher ballpark figure.

Whatever your personal financial situation, you may want to consider sticking to the 30% rule to avoid mortgage stress. This means trying to keep your mortgage costs at or below 30% of your post-tax income.

If you’re struggling to work out how much you need for a home loan, especially if you’re self-employed or a business owner, it may be worth speaking with a broker. They may be able to provide home loan advice and assistance with your mortgage application.

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