How much can I afford to borrow?

The maximum amount you can borrow for a home loan may depend on a wide range of different factors. Every mortgage lender uses different eligibility criteria to assess home loan applications, but some of the common factors that may be considered include your:

• income
• expenses
• assets
• liabilities
• credit score
• deposit

Whether you're applying for your first home loan or refinancing to extend your loan, the more evidence you can provide a lender that you’re a reliable borrower who can make repayments on time, the more money they may be willing to lend you.   

To work out how much a lender may choose to lend you, our Borrowing Power Calculator takes the following steps: 

1. Add up your total assessable income, including that of your joint borrowing partner (if applicable).
2. Work out your total living expenses. You can manually enter your own expenses, including other home loans, personal loans and credit card credit limits. Alternatively, you can use an automatic estimate of minimum monthly expenses for singles or couples with different numbers of dependants, based on the latest Melbourne Institute - Poverty Lines: Australia report (see table).
3. Set aside 15 per cent of your income as a buffer to cover any unforeseen circumstances.
4. Work out how much money is left over in your budget to go towards your monthly mortgage repayments.
5. Calculate your home loan repayments for a 30-year loan and an interest rate of 5.5 per cent. Fixed rates and variable rates are at historical lows, but lenders play it safe and assume they won’t always be. The floor rates used vary between lenders, though 5 or 6 per cent is a common benchmark.
6. Determine the maximum borrowing capacity (loan size) based on your assessable income left over after your total expenses, including loans, credit cards and 15 per cent buffer are factored in.

Remember that this loan amount is just an estimate, and that each lender will look at your finances slightly differently when assessing your loan application. Your maximum borrowing amount may vary depending on which bank or mortgage lender you speak to.

Default Monthly Household Expenses

Based on the latest Melbourne Institute - Poverty Lines: Australia report

• All calculations are estimates; they are not guarantees you’ll be able to borrow a particular amount, and are not pre-qualifications or pre-approvals for borrowing.
• Calculations are only accurate for the values entered into the calculator, and assume that these will stay the same for a 30 year loan term. The calculator does not account for changes to interest rates or your cost of living over this time.
• Lender serviceability assumptions can change at any time; this will affect how much you can borrow.
• Interest rates can change at any time. The calculator assumes a floor rate of 5.5 per cent, but you may want to consider a higher percentage if you believe rates may rise even higher in future.
• This calculator measures loan serviceability, which is only one factor used by lenders when deciding whether to offer you loan approval. Your credit history, financial situation, employment details and what property you are buying may also play a role in determining your eligibility for a home loan product.
• This calculator is for information purposes only. Any advice is general and has not taken into account your personal circumstances. Read our full disclaimer.

After using a borrowing power calculator, you may find that you have less borrowing power than you’d like. First home buyers can be particularly vulnerable to shortcomings in their borrowing power, especially when property prices are high.

If you have less borrowing power than you’d like, you may miss out on buying your preferred property, or have to budget for extra expenses such as Lender’s Mortgage Insurance (LMI).

However, support options are available when applying for a mortgage, which may allow you to borrow more, or pay less as a deposit. Most of these options are intended for first home buyers, who my face more hurdles than others when it comes to building their borrowing power.

Some of these options include:

• Saving a bigger deposit: Not as easy as it sounds, but effective. Keep in mind that many lenders will want your deposit to be made up of genuine savings – in other words, money earned from your job. Gifts, inheritances, lottery wins and similar windfalls may need to be held in a savings account for a minimum length of time before they can be counted towards a deposit.
• Joint mortgage: Applying for a mortgage with your spouse or partner may allow you to put twice the savings and income towards servicing the home loan, though your joint expenses may also need to be considered.
• Paying Lender’s Mortgage Insurance (LMI): It’s possible to get a home loan with a smaller deposit of 15 per cent, 10 per cent or 5 per cent of a property’s value, though you’ll need to cover the cost of your lender’s LMI. The smaller your deposit, the more your LMI may cost, but if you can budget for it you may be able to improve your borrowing power. Some lenders may even waive LMI for some borrowers, such as those with 15 per cent deposits.
• Guarantors: If you have a parent or similarly close relative who owns their home, they may be able to use their equity to guarantee your mortgage application. This means you may be able to apply with a smaller deposit or even no deposit and pay no LMI. Of course, the guarantor will become responsible for your loan if you default on your repayments, so make sure everyone is aware of the risks involved before applying.
• First Home Loan Deposit Scheme (FHLDS):This federal government program may allow you to apply for a mortgage with just a 5 per cent deposit, with the government effectively serving as your guarantor. Keep in mind that a limited number of places are available in the scheme each year, a limited number of mortgage lenders are participating, and both you and the property you’re purchasing will need to fulfil the scheme’s eligibility criteria.
• First Home Owners Grants (FHOGs): Offered by state and territory governments, these grants may be able to help boost your home loan deposit. Other incentives may also be available from your state government for first home buyers, such as waived stamp duty.
• First Home Super Saver (FHSS) scheme: In this scheme, you can make extra contributions to your superannuation fund, and access up to $15,000 of these extra contributions ($30,000 for a couple applying jointly) to use for your first house deposit. 

Once you have an idea of how much you may be able to borrow to buy a home or investment property, it’s important to also think about how much you can afford to pay as a deposit. Generally, the more money the home buyers can save up as a deposit, the easier it may be to secure a larger new home loan.

Many lenders in Australia will prefer that you pay a minimum home loan deposit of at least 20 per cent of the property value upfront. This is sometimes described as having a loan to value ratio (LVR) of 80 per cent. For example, if you’re planning to buy a property with a valuation of $500,000, you may need a deposit of $100,000 in order to borrow $400,000.

Having a smaller deposit doesn’t mean you can’t get a home loan, though it may be harder to get the lowest interest rates. You may be able to apply for a home loan with a deposit of 10 per cent or even 5 per cent of the property’s value. However, having a deposit lower than 20 per cent means you’ll likely need to pay for a Lenders Mortgage Insurance (LMI) policy. This covers your lender (and not you) against the risk that you’ll default on your monthly repayments (or fortnightly repayments).

Most banks and mortgage lenders pass the cost of LMI on to borrowers – the lower your deposit, the more your LMI may cost. This could add tens of thousands of dollars to your loan’s upfront costs. It’s sometimes possible to add these extra costs onto your mortgage to pay off over your loan term, though the extra interest repayments over time may ultimately cost you more money.

It’s often important to show that most of your home loan deposit is made up of savings from money earned at your job. This savings history can demonstrate your financial responsibility to potential lenders, which may help improve your chances of seeing your mortgage application approved.

Mortgage lenders may look at more than just your financial situation when assessing your borrowing power. A few other factors that could affect how much you can borrow include:

Credit history

Because a home loan is secured by the value of the property, your credit score may not play as large a role when applying for a mortgage as it may when applying for a personal loan or a credit card. However, your record of borrowing and repaying money can still help a lender get a better idea of your financial responsibility, so borrowers with bad credit may find it harder to successfully apply for a home loan than a borrower with a good credit score.

Outstanding debts (including credit cards and HECS/HELP debt)

If you already owe money on personal loans, car loans or other debts such as education loans, a responsible lender may not be willing to lend you more money that could put you into financial stress. Paying off your outstanding loans may help to boost your borrowing power.

Keep in mind that when it comes to credit cards, a lender may look more closely at your maximum credit limit than your current credit balance. A responsible lender will consider a ‘worst case scenario’ where you are paying interest on a maxed-out credit card limit to determine if you could still afford your mortgage repayments.

Whether or not you’re currently renting

If you can afford rent, surely you could afford a mortgage, right? Unfortunately, lenders may not see it that way. Even if you could afford a mortgage with repayments equal to your current rent, what if interest rates were to rise?

Even if you’re living with family and not currently renting, lenders may still factor ‘notional rent’ into your expenses when calculating your borrowing power to account for the risk that your living situation could change and you may need to start renting soon.

Entertainment spending

When looking at your income and expenses, some lenders may note if you’re regularly spending a significant amount on takeaway food, buy now pay later services like Afterpay,  and more. This may indicate that you’re less than responsible with your money, which may make the lender less willing to lend you a large sum to buy a house.

While responsible lenders try to avoid lending you more money than you can comfortably afford to repay, a large mortgage can still put you at risk of mortgage stress. If your interest rates were to rise, your household expenses increased, or your income was reduced, your finances could be stressed and put under pressure.

You can estimate the cost of a mortgage using a home loan repayment calculator, and then estimate if this home loan is likely to put you at risk of financial stress using a mortgage stress calculator.