Get an estimate of how much you can borrow
A borrowing power calculator should be used before even searching for a property to give you an idea of how much you can afford to spend.
All you need to do is enter in your income, expenses and other financial commitments, as well as some loan details and you'll get an estimate of your borrowing power. You can also discuss the results with a qualified mortgage broker to get more information and to find out about other loan options.
This calculator doesn't give a result based on your deposit size. This is because lenders decide how much to lend you based on a range of factors.
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How to use the home loan borrowing power calculator
One of the first factors your potential lender will look at when evaluating how much you can borrow, in addition to your deposit, is your income. Your income will dictate how much you can repay off your loan each month, so they'll want to know if your income can meet the repayments for the size of loan you want. To find out how much your repayments would be on a particular loan size use our repayment calculator.
Your potential lender will ask you the following types of questions in regards to your income:
- How much of your income have you been able to save?
- Has your income increased or decreased?
- What are your ongoing financial commitments?
If you're married or buying your home with your partner, the household income factor rises, and in turn so does the probable amount you can borrow. While this may seem great, remember there are still situations you must plan for, such as if one of you loses your job or if you decide to have children.
Proof of your ability to save is particularly important if you're buying your first home. If you're a first home buyer you may be entitled to the First Home Owners Grant (FHOG).
A good savings history will also tell a potential lender that you're likely to be able to keep up with regular repayments. If you already have a home loan and want to refinance, a savings pattern may not be so important because your potential lender will have your loan repayment history to assist them in their decision.
Before you go on, note that in addition to finding out how much you can borrow, you should work out how much you should borrow.
Your debts and what you spend each month are as important as your deposit, income and savings. When you want to work out how much to borrow you need to consider any financial commitments and debts you regularly put your income towards to find out if your income is still sufficient to make your repayments.
Before meeting with your lender to discuss how much you can borrow, make a determined attempt to get rid of all the outstanding debts that you can, and if possible get rid of any credit cards you don't need. Go into discussions with your potential lender with as little financial baggage as you can and you're likely to be rewarded with increased borrowing capacity.
Some debts or expenses may decrease the amount you can borrow or even cause your loan application to be rejected. In addition to what's been discussed above, these may include:
- Payment history: Do you pay on time? This is a determining factor in loan approval. Payment history includes credit cards, bills, car loans, mortgages and loans of all types. Bankruptcy is also taken into consideration.
- Outstanding debt: Most people have debt, but the lender wants to know how much you have. Outstanding balances for credit cards, personal loans, car loans and mortgages will determine a how much a lender thinks you should be able to borrow. It's important to note that your overall credit card limit will be used to asses your current level of outstanding debt - this is your entire credit limit, not just what you have used.
- Debt to income: The classic ratio of what you owe to what you make. This ratio is used to determine your ability to pay your current debt and possible future debt if you are approved for any loans or mortgages. Child care costs and children in general can sometimes reduce your borrowing power.
- Credit history: How long have you had credit? The length and usage of your accounts are taken into account. Not only does this show items like foreclosures and bankruptcies but also shows attempts at repaying debt. Loan processors use this to try and determine how reliable you are to pay back the loans.
- Applications for new credit: Each time you apply for credit it's noted in your credit history and lenders will look at this.
The type of loan you choose, as well as the term you plan to keep it for, also has a bearing on your borrowing power. A loan with minimal features, that has low fees and has a low interest rate might mean your repayments are lower and therefore could mean you can borrow more. If you plan to pay off your loan in 30 years as opposed to 25 years this will also lower your repayments. On the other hand a shorter loan term could save you thousands of dollars in interest but increase your repayments. When you meet with your potential lender or mortgage broker make sure you discuss the different options available.
Before you apply for a home loan, get your finances in order. Being prepared not only increases your chances of being approved, but also of you borrowing the amount you want. Regardless of how much your lender decides to lend you, work out if the loan suits you and your situation, what features it offers you and if you could still comfortably afford your repayments if interest rates increased.
While it's not in the calculator, your deposit will also make up a big part of how much you're able to borrow.
One of the ways a potential borrower can demonstrate their ability to make repayments is through their deposit size. A large deposit demonstrates you've been able to save regardless of your expenses. This means the amount a lender will let you borrow depends on how large your deposit is in relation to the value of the property, otherwise known as an LVR.
An LVR is shown as a percentage and is worked out by dividing the loan size you require by the value of the property. Look below to find out how to work out what your LVR would be.
Chad is looking at purchasing a $400,000 home. He's got a deposit of $40,000 saved up and is ready to go. To work out his LVR, he first needs to find out how much he'll need to borrow. To do this Chad needs to subtract the deposit he's saved from the value of the property he wishes to buy.
Next, he needs to divide this amount by the value of the property and then multiply it by 100.
This means Chad's LVR would likely be 90%.
Lenders generally set the maximum LVR at 95% or lower. That's the most they will lend out, unless you're able to get a family guarantee, in which case you can sometimes borrow as much as 100%. If you're self employed and want to take out a loan with low documentation requirements a lender may require an LVR of 60% - that is you need a deposit of 40% of the value of the property. If you're not self employed, have a good credit history and opt to pay for lenders mortgage insurance (LMI), then you may be able to take out a loan with an LVR of 95%, meaning you only need a 5% deposit.
Remember that you also need to account for other costs when purchasing a home, which can include:
- Stamp duty
- Legal fees
- Building/pest inspections
- Home insurance
- Repair fees
- Maintenance fees
- Loan feature fees for facilities such as redraw
These may not make up your LVR but you should get acquainted with different types of fees and how much they may cost you.
How can I find out what a specific bank will look at when deciding how much I can borrow?
You may find it helpful to approach a mortgage broker. They'll be able to go through each aspect of your application and use their past experience with lenders to steer you in the direction of a loan which matches your eligibility.
How can I increase my borrowing power?
As alluded to in the article, you can increase the amount you can borrow in a number of ways. The easiest ways are to decrease your debts and liabilities and increase your income. Think about asking for a pay rise, starting a second business, or investing money into assets such as shares and making a regular income from dividends.
To decrease your debts, think about starting a budget and paying down your credit cards, in addition to closing non-essential credit accounts and loans.
How will my credit file effect my home loan application
Your credit file acts as a way for your prospective lender to know whether or not you'll be able to pay back your loan, in addition to your income and debts. If your credit file shows late payments, defaults and other negative listings, you may find it difficult to obtain a loan. Always obtain a copy of your credit file before lodging an application with any lender.