Borrowing capacity (or borrowing power) is the maximum amount a lender will likely offer for a home loan. This figure is based on their rigorous assessment of your ability to manage repayments, even if interest rates increase. Understanding your capacity is crucial for:
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Understanding the six critical elements that lenders evaluate when determining how much you can borrow for your home loan.
The foundation of your borrowing capacity
What it is
Your gross (pre-tax) income from all stable sources. This includes salary/wages, regular commissions/bonuses (lenders may scale these back), self-employed income (often requiring 2+ years of records), and sometimes rental income.
How it matters
Higher, stable income generally means you can service a larger loan, increasing your borrowing capacity. Lenders look for consistency and reliability.
Example
Someone earning a stable $90,000 p.a. will generally have a higher borrowing capacity than someone earning $70,000 p.a., assuming all other factors are equal. If applying jointly, combined incomes significantly boost potential borrowing.
Every dollar counts toward your borrowing power
Regular monthly spending on essentials and lifestyle. Lenders compare declared expenses against benchmarks like HEM and use the higher figure.
Lower expenses mean more disposable income available for loan repayments, positively impacting your borrowing power.
A household with managed monthly expenses of $2,500 might qualify for a larger loan than one with $3,500 per month expenses.
Current commitments that reduce available income
All current financial commitments including credit card limits, personal loans, car loans, student debts, and buy-now-pay-later services.
Existing debt repayments reduce income available to service a new home loan, directly decreasing borrowing capacity.
A $500/month car loan could reduce maximum borrowing by tens of thousands compared to having no car loan.
Your savings that determine the loan-to-value ratio and insurance requirements
The amount of money you have saved to contribute towards the property purchase. This determines your Loan-to-Value Ratio (LVR) – the loan amount as a percentage of the property value.
A larger deposit reduces the lender's risk and lowers your LVR. If your LVR is high (typically above 80%, meaning you have less than a 20% deposit), you'll likely need to pay Lenders Mortgage Insurance (LMI), which adds to your costs (or can sometimes be added to the loan, slightly reducing how much you can borrow for the property itself).
With a property valued at $500,000, a $100,000 deposit (20%) means an LVR of 80% and avoids LMI. A $25,000 deposit (5%) results in a 95% LVR, requiring LMI and potentially limiting borrowing options or increasing overall costs.
Your borrowing and repayment track record that signals reliability to lenders
A record of your past borrowing and repayment behaviour. Lenders check your credit score and report for defaults, late payments, or too many credit applications.
While not always a direct input in a basic borrow calculator mortgage tool, a poor credit history can lead to loan rejection or a higher interest rate offer, indirectly affecting affordability. A clean history signals reliability.
Someone with multiple recent defaults may struggle to get approved, regardless of what a calculator estimates.
Interest rates and loan terms used for assessment including serviceability buffers
The proposed length of the loan (e.g., 30 years) and the interest rate used for assessment. Crucially, lenders don't use the current advertised rate; they use a higher "assessment rate" or "serviceability buffer" (often 2.5-3% above the actual rate) to ensure you can still afford repayments if rates rise.
A longer loan term reduces monthly repayments (increasing borrowing capacity) but means paying more interest overall. The higher assessment rate used by lenders is a key factor limiting the maximum loan amount compared to simply calculating repayments on the current rate.
A lender might assess your ability to repay a loan using an interest rate of 8%, even if the actual rate offered today is 5.5%. This stress test directly impacts the final borrowing amount they offer.
Lenders use complex formulae, often incorporating:
Our “how much can i borrow” calculator home loan provides a simplified estimate based on these principles. However each lender has different policies, assessment rates, and appetites for risk, which results in different borrowing capacity.
One of the most significant risks associated with using a borrow calculator is overestimating borrowing capacity. Borrowers may be tempted to stretch their finances beyond their means, leading to potential financial strain. It is crucial to approach financial planning conservatively, ensuring that estimates reflect realistic borrowing limits. A more cautious approach helps protect you from financial pressure and makes it easier to stay on top of repayments over the long term.
Many first-time buyers overlook the additional costs associated with homeownership. Hidden expenses such as property taxes, maintenance, and insurance can add up quickly. When using a borrow calculator, it is essential to factor in these costs to gain a comprehensive understanding of the financial commitment involved in purchasing a home.
If your initial home loan health check or calculator result is lower than you hoped, or if you simply want to maximise your potential borrowing power as a first home buyer, taking proactive steps can make a significant difference. Lenders assess your capacity based on your income, expenses, and existing debts, so optimising these areas is key.
Reduce Existing Debts: Pay off personal loans, car loans, or credit card balances.
Lower Credit Card Limits: Lenders assess full limits; request reductions on unused cards.
Save a Larger Deposit: Aim for 20% to avoid LMI and increase lender confidence.
Cut Discretionary Spending: Review your budget for areas to save, directly impacting expense calculations.
Check Your Credit Report: Ensure accuracy and address any errors.
Maintain Stable Employment: Lenders value job security and consistent income.
You've used the home loan borrow calculator – what now?
