How much can I borrow? A guide to finding out

It’s important to plan for any large decision in life. Making a large purchase – a home, investment or car/boat etc – requires research, preparation and forecasting. And, unless you’ve saved the whole amount, you may need a loan to help make it happen.

Calculating your borrowing power before you start searching for your next big thing gives you the ability to know how much you can spend.

How much can I borrow on a home loan?

If you’ve decided that you’re interested in buying a home, then working out how much you can borrow may help you work out which types of property are available within your budget. Our handy borrowing power calculator could help you assess the amount.

Buying a home is a big financial commitment and there are some questions to consider asking yourself before making the decision, including:

• What are your weekly, monthly and yearly expenses?
• What would you do if an unexpected expense came up (a hospital visit, car damage etc)?
• What would happen if you were to lose your job/be unemployed for an extended period of time?
• What savings do you have?
• What does your income look like, and how is this set to change over the short, medium and long-term future?

The answers to these questions could help you work out what you can afford to borrow – which may differ from the figure you originally had in your head.

If you’re someone that is looking to plan for the future, and you want to build up some savings to put towards purchasing property, then it may be worth looking into setting up one or more term deposits to potentially help you reach your savings goals.

Can my home loan deposit affect my borrowing power?

The size of your home loan deposit can affect your borrowing power. As your deposit gets smaller, your borrowing capacity may diminish, so cutting back your expenses could help you save for a bigger deposit.

If your deposit is less than 20%, then you’ll likely be required to pay Lenders Mortgage Insurance (LMI), unless you’re eligible for the First Home Guarantee, which is part of the Australian Government’s Home Guarantee Scheme. Under this this initiative¹ the National Housing Finance and Investment Corporation will guarantee part of an eligible first home buyer’s home loan, allowing them to purchase a home using a deposit as small as 5% without paying LMI.

What affects my borrowing power for a home loan?

There are a range of elements that may affect how much you can borrow for a home loan. Each financial institution will have their own lending criteria.

Our home loan specialists can help you understand what criteria they use to assess your cash flow and your ability to consistently make loan repayments.

Things that banks will typically consider when assessing your borrowing power include:

Whether you have any dependents or are purchasing with other parties (for example, a spouse)

• Your credit history
• The size of your deposit, and whether it’s cash or equity
• Any existing debt you may have
• Your employment history
• The type of home loan you’re looking for
• The state of the market, including interest rates

How do I calculate my borrowing power?

On a basic level, borrowing power is:

Income (your salary and other income such as overtime, rental income etc) less Tax less Expenses (living expenses and existing financial commitments such as credit cards, loans etc).

Other considerations include whether you have any dependents and whether you’re looking to purchase a home to live in or an investment property. You may also be able to borrow more as a joint borrower with your spouse’s income included.

Of course, it varies from financial institution to financial institution (and a buffer is likely to be applied), but some version of this calculation is used to work out whether you have any leftover surplus each month. If you don’t have any extra in the tank, it’s unlikely you’ll be able to add in loan repayments.

Hopefully, though, you do have a bit leftover each month. If you had $2,000 leftover, this may be roughly equivalent to your ‘Borrowing Power’. In other words, you may have the ability to pay off a loan by $2,000 every month.

The more you have leftover, the higher your ‘Borrowing Power’ is likely be.

Save yourself the time trying to calculate it yourself though. Most financial institutions – us included – have a few very handy calculators on their websites. It makes calculating your ‘Borrowing Power’ simple and is likely to take into account any unique criteria relevant to that financial institution’s decision-making process.

What information do I need?

It depends on what type of loan you’re applying for (i.e. home loan, personal loan, credit card etc), whether it is a secured or unsecured loan and whether you’re borrowing as a single or joint applicant.

Before you sit down with our ‘Borrowing Power’ calculator, it’s best to gather together:

• Your gross or net salary details, as well as your partner’s (as well as any other income you may have)
• Your existing loan repayments, credit card limits and the total of your other living expenses
• Basic details of what type of loan you’d like, including interest rate and term

How do I calculate my borrowing power?

Once you know your rough borrowing power, you can start considering whether you’d like to apply for a loan. Feel free to call us on 1300 747 747 to speak with one of our home loan specialists.

 

[1] First Home Guarantee – Overview - National Housing Finance and Investment Corporation (https://www.nhfic.gov.au/what-we-do/support-to-buy-a-home/first-home-guarantee)

 

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 Published November 2018, updated September 2022