Borrowing power: How much can I borrow for a mortgage?
Here's a quick way to calculate what you can afford to borrow and repay based on your income.
When a lender looks at your mortgage application it considers your loan size, deposit, income, and factors like your debts and spending habits to forecast your borrowing power.
You can also work out a rough idea of how much you can afford to borrow by working out the following:
- How much of a deposit can you save?
- How much can you afford in mortgage repayments per month?
You can also put some figures into a borrowing power calculator to get a quick estimate.
Borrowing Power Calculator
How much can I afford to borrow based on my deposit?
Borrowers typically save a 10% or 20% deposit. The smaller your deposit, the more you have to borrow. And this makes your repayments more expensive. And it may limit how much you can borrow.
Here are some examples of how much you would have to borrow with different property values, plus repayments, based on a 20% deposit size and a 6.00% interest rate.
|Property value||20% deposit||Borrowing amount||Monthly repayment|
You can use a loan repayment calculator to try similar calculations based on your needs. This will help you get a better idea of what you can afford to borrow.
But how much will your lender let you borrow? That's a different question.
How do lenders calculate how much I can borrow?
Lenders decide how much you can borrow based on what's known as serviceability calculations. These calculations take into account your income from various sources along with your expenses. Lenders then look at the proposed mortgage debt as a proportion of your monthly income and build in a buffer for potential interest rate rises.
Every lender works out your borrowing capacity with its own formula, which means the amount you can borrow will vary between lenders. Their calculations will depend on things like:
- Your income and expenses
- Your debts and liabilities
- Your deposit size
- The value of your property
- Your credit history
- Your employment history
To maximise your chances of getting a loan approved, or borrowing more, you should check your credit score in advance, minimise your spending in the months before applying for a loan and pay down any outstanding credit card or personal loan debts.
How much of your salary can you afford to spend on repayments?
As a rough rule of thumb, you don't want to spend more than 30% of your income on mortgage repayments.
So a very quick way to work out what you can afford to borrow is to:
- Take your annual income.
- Work out 30% of that figure.
- Divide by 12 to get a monthly repayment.
Here are some quick examples:
- $50,000 annual gross income at 30% = $1,250 per month.
- $75,000 annual gross income at 30% = $1,875 per month.
- $100,000 annual gross income at 30% = $2,500 per month.
How much do you currently spend on rent?
If you're a first home buyer currently renting, you can test how much you can afford to borrow using your rent as a rough commitment.
- Work out how much you currently spend on rent.
- Calculate what your monthly mortgage repayments would be with a loan amount you feel comfortable with.
- What's the difference? Can your bank balance handle the increased costs?
This could be an opportune time to reduce your expenses. Negotiate or shop around for savings on your utilities, memberships and subscriptions. Do you really need all of them and are you using them? Look for ways to be more mindful of unnecessary "tap and go" purchases if you are serious about saving a deposit and buying a home.
How much should I borrow?
Sometimes a lender will let you borrow much more than you feel you can comfortably repay. In some cases, a lender's estimate may be on the low side, and you might be disappointed by the maximum amount available to you.
Either way, you need to know how much you can borrow without straining your ability to repay the loan. To do this, answer the following questions:
- Can you afford the repayments? Be honest. After looking at the amount you'd have to repay each month, can you afford it?
- What kind of lifestyle do you want? Taking on the responsibility of a home loan could mean you'll have to curtail your spending in other areas, like eating at restaurants, spending on takeaways or online shopping. The more you borrow, the more you may have to cut back elsewhere.
- What life changes are on the horizon? Are you planning to have children soon? Are you contemplating a break in your career? These changes could affect your income in the future and make it harder to repay a big loan.
- Have you factored in interest rate rises? Interest rates are likely to rise during your mortgage. Take your current interest rate (or an example rate) and add another 2 to it (so take 2.00% and make it 4.00%). Can you still afford the higher repayments?
Be sure to factor in all your buying and borrowing costs
Buying a home comes with so many costs that can eat into your deposit. If you don't factor these in before applying for a loan you might find your borrowing power gets much smaller.
- Stamp duty. This is the tax charged by your state or territory government on buying a property. It can cost you tens of thousands. If you're buying an expensive home in a city like Sydney, stamp duty can run to $50,000 or more.
- Lenders mortgage insurance (LMI). You only pay this when your deposit is less than 20% of your property's value. But it can be quite expensive, running to thousands or even tens of thousands of dollars. Luckily, it's possible to borrow LMI costs along with your loan, which means you don't have to sacrifice part of your deposit to pay for it.
- Conveyancer's fees. You need a conveyancer to check your contract of sale and make sure the property transaction goes smoothly. You normally pay over $1,000 for this.
- Other costs. Don't forget about building and pest inspections, home and contents insurance, and loan fees. It all adds up.
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