Borrowing Power

Maximum Borrowing Capacity

How much can I borrow?

Most of the time, the amount you need to borrow has been worked out well before beginning your property search. As people get closer to purchase, many things conspire to influence what they eventually borrow. (Not least of all that many of us end up purchasing properties at prices greater than we initially intended!)

How do lenders assess your borrowing capacity?

Lenders take into account the maximum cost of the property (including purchase costs if these are to be included in the loan), the size of your deposit and the loan repayments at current interest rates (some lenders use a higher "stress" rate which factors for potential rate rises). They will typically review all your income sources and expenditure, add a margin for safety, and then calculate your uncommitted monthly income. The most important factor to a lender is your level of uncommitted monthly income. The greater it is, the larger your borrowing capacity overall.

Factors that can impact your borrowing capacity include:

• Loan Value Ratio
• Income and types of income, e.g. casual vs full-time
• Other loans
• Credit card limits
• Loan terms
• Number of dependents and their situation
• Loan products
• Tax rates
• Rental income

Lenders calculate maximum borrowing capacity differently

When it comes to the cold, hard facts of how much you can borrow, it might surprise you to know that lenders calculate your borrowing capacity differently, so it pays to talk to mortgage broker.

how are credit cards treated?

Lenders will look at the limit on your credit card and treat your card (or calculate repayments) as if your card is fully extended.  The best thing to do when applying for a home loan is to adjust your limit downward (and your credit card spending) so that it doesn't affect your capacity to borrow what you need.  

Examples of different lender results for the same scenario

To help you understand the extent to which lenders will differ in both your maximum borrowing capacity and the interest rate or deal you may be offered, these illustrations give you an idea of how the maximum borrowing capacity might vary across a number of lenders for the same customer scenario. Good mortgage brokers can show you this information and talk you through the pros and cons of the associated products.

* 30 year home loan; 7.82% interest rate, one credit card with a limit of $2,000; no other debts; joint applicants = one income per earner per couple; capacity is indicative only and based loosely at the median.

Borrowing Capacity schedule

If you are the kind of person who needs a "general rule" as a guide, you could safely assume that most major lenders will draw the line at allowing you to borrow 40% of your gross income going towards your loan repayments. If two people are applying for a loan, then incomes are added together and treated as one amount, although outgoings are treated separately. The size of your family will of course also impact your assumed outgoings. The schedule below gives you some idea of what you would typically be able to borrow. While you can't present these numbers "to the bank" as evidence to support your application, they are a useful guide.

* 30 year home loan; (8.07% interest rate, one credit card with a limit of $2,000; no other debts; joint applicants = one income per earner per couple; capacity is indicative only and based loosely at the median.

Get pre-approved first

Home loan pre-approval is something you should definitely get if you have the time. Most lenders offer it and it is usually valid for three months. As you would expect, it is subject to the conditions under which it is approved, but it does give you a very clear framework within which to work.