How much should you borrow for your home loan?

How much should you borrow for your home loan

When you’re applying for a home loan, the amount you’re eligible to borrow may be different than the amount you actually should borrow.

Banks have some sophisticated systems for deciding the maximum amount of money they will lend you. They take into account all your assets and liabilities, look at the median spending habits for people in similar situations and build in interest rate buffers to ensure that you can still afford your home loan should rates rise.

What banks can’t take into account is your particular personality. Only you know your own budgetary discipline. This means you need to take into account not just how much you can borrow, but how much you should borrow.

How banks decide what you can borrow

Lenders decide how much you can borrow based on serviceability calculations. These calculations take into account your income from various sources along with your expenses. Lenders then look at the proposed debt as a proportion of your monthly income and build in a buffer for potential interest rate rises.

How banks calculate serviceability

When calculating your expenses, lenders vary in their approach. While some look at your actual expenditure, others use models that estimate your expenses. They do this by looking at the median Australian household spend for basics such as food, utilities and transport, and then adding in a set amount for discretionary spending.

How banks calculate your expenses

Based upon the lender’s calculations of your monthly expenditure and your monthly income, lenders will decide the maximum amount of additional debt they believes you can service. In deciding on the size of the home loan to offer you, lenders will also take into account the type of property you’re buying and the size of the deposit you have.

How you should decide what you can borrow

What the bank will lend you may differ from the amount 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. In other cases, a lender may be willing to extend you more credit than you feel comfortable accepting.

Before you decide how much you should borrow, you need to ask yourself a few questions:

What kind of lifestyle do I want?

In all likelihood, taking on a home loan means you’ll have to make a few changes in your lifestyle. While home ownership comes with many positive lifestyle changes, it can also mean some changes that might not be so welcome.

Taking on the responsibility of a home loan could mean you’ll have to curtail your spending in other areas. If you’re used to going out, spending on takeaways or buying a lot of discretionary items, you may have to significantly adjust your lifestyle once you have home loan repayments to make. How significantly will depend on how much you borrow.

To get an idea of the amount a home loan will add to your monthly expenditure, you can use the repayment calculator below. You can look at various borrowing scenarios to see what your repayments will be if you borrow different amounts.

Before deciding on the amount you’re comfortable borrowing, have a look at your current average monthly expenditure. Once you’ve figured this out, honestly assess what sacrifices you’re willing to make to pay your home loan repayments.

Am I comfortable paying LMI?

One of the factors that will determine the amount lenders will offer you is the size of your deposit. Some lenders will approve home loans with as little as a 5% deposit, but if you choose to take this option, you’ll find yourself paying lenders mortgage insurance (LMI).

LMI is an insurance policy that covers your lender in the event you default on your home loan. It’s charged when you borrow more than 80% of the value of the property you’re buying. LMI can add thousands of dollars to the cost of a home loan and will end up increasing your home loan repayments.

If the added burden of paying LMI is too much, you might need to rethink the amount you want to borrow. If you can keep your loan-to-value ratio (LVR) below 80%, you can avoid having to pay this added expense.

How disciplined am I?

Once you’ve decided on the kind of lifestyle you’re comfortable with, you’ll have to assess whether you have the discipline to stick to your new lifestyle.

You’ll need to take an honest look at your own financial discipline before you decide to take on a home loan. It takes a fair amount of discipline to service any home loan, but a home loan debt that substantially increases your monthly expenditures will require a very disciplined approach.

While it’s important to work out a budget based upon the standard of living you’d like to have, sticking to this budget will be the difficult part. If you have a budget and find that you typically overspend, you need to factor this into your assessment when deciding how much to borrow. If financial discipline is difficult for you, leave yourself some leeway in your home loan repayments.

What life changes might be on the horizon?

A budget and an honest assessment of your discipline will give you a good idea of the home loan you can afford right now, but you’ll also want to prepare yourself for the future. Any life changes could impact your ability to repay your home loan. Although some life changes are unforeseeable, you can factor others into your financial plan right now.

If you plan on having children in the next few years, you’ll want to factor this added expense into your calculations. Likewise, if you’re looking at a career change in the medium term, think about the impact this could have on your income.

If you’re borrowing as a single person, you might want to consider the possibility that one day you’ll be repaying your home loan as a couple. Adding another person to the mix can help alleviate some of the financial burden, but keep in mind that you’ll also be adding that person’s debt and expenses to what you need to pay.

You might not be able to predict all of the life changes that could happen during the term of your home loan, but it’s wise to leave yourself some breathing room just in case.

What extra costs will I face?

The expense of a home doesn’t end with a home loan. Before you even move in, you’ll also need to budget for a variety of expenses involved in the home buying process. You’ll likely have to pay stamp duty, legal fees and fees for building and pest inspections. After the home loan settlement, you’ll also have to pay for removalists to help you move into your new home.

There are also ongoing expenses associated with homeownership. In addition to your home loan repayments, you’ll have to factor in home and contents insurance payments, council rates, utilities, maintenance and upkeep. Depending on the type of property you move into, you may also have strata or body corporate fees.

These costs add up and can be a significant monthly expense. When deciding on how much you should borrow, you should keep these ongoing expenses in mind along with your home loan repayment.

Hidden costs of homeownership

Lenders are fairly conservative in their assessment of what you can afford. It doesn’t behove them to lend money that borrowers are unable to repay. But as conservative as they might be, they can’t factor in some of your unique personal circumstances. By taking the time to assess your own lifestyle and financial discipline, you can make sure you don’t take on more than you can afford.

Compare today's home loan rates

Rates last updated August 17th, 2018
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.64%
3.66%
$0
$0 p.a.
80%
Competitive interest rate and limited fees
A simple mortgage with a competitive interest rate and no application or monthly fees. Borrow up to $2 million from a convenient online lender.
3.59%
3.59%
$0
$0 p.a.
80%
Special discounted interest rate
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
3.64%
3.65%
$0
$0 p.a.
80%
Get approved faster with a speedy online application
Low interest rate and limited fees. Add a 100% offset account for $10 a month.
3.68%
3.82%
$0
$10 monthly ($120 p.a.)
80%
Earn Velocity Frequent Flyer Points with this mortgage to spend on flights and more (subject to eligibility requirements). Redraw facility available on this variable rate home loan. Competitive interest rate.
3.69%
4.11%
$0
$395 p.a.
80%
Save on interest with a 100% offset account
Unlock a range of savings with this competitive package home loan offer. Offset account and redraw facility included.
3.70%
3.90%
$0
$0 p.a.
70%
Requires a 30% deposit
Enjoy all the benefits of the Basic Home Loan and take advantage of an offset account.
3.49%
4.57%
$0
$395 p.a.
90%
Save on interest with a 100% offset account
Loans over $150k get a discount off an already low fixed rate. Available for NSW, QLD and ACT residents only.
3.64%
3.78%
$0
$10 monthly ($120 p.a.)
80%
Earn thousands of Velocity Frequent Flyer Points on your mortgage (subject to eligibility requirements). Plus, access a 100% offset account to save on interest.
3.75%
3.75%
$0
$0 p.a.
70%
This sharp rate product requires a 30% deposit
Pay no application or ongoing fees and get a flexible loan with the ability to split up to 6 times.
3.84%
3.84%
$0
$0 p.a.
80%
Low fee online mortgage
Pay no application or ongoing fees and get access to a free redraw facility with this innovative online lender.
3.71%
3.71%
$0
$0 p.a.
70%
A variable rate home loan that has a lot of flexible features. This loan has a 100% offset account.
3.64%
3.68%
$0
$0 p.a.
80%
A competitive interest rate for first home buyers that keeps fees low. You will need a 20% deposit and can borrow up to 500000.
3.69%
3.70%
$0
$0 p.a.
90%
Cut down on interest payments with a 100% offset account
Package your loan and get an interest rate discount and help from an HSBC relationship manager. Low fees help you save even more.
3.72%
4.10%
$0
$395 p.a.
80%
100% offset account plus package discounts
New borrowers or refinancers from another lender get a discounted rate with this package loan.
3.64%
3.79%
$0
$10 monthly ($120 p.a.)
70%
100% offset account and a competitive rate
Low rate, low fee loan for owner-occupiers. You will need a 30% deposit to get this mortgage.
3.54%
3.59%
$0
$0 p.a.
80%
$900 cashback offer on settlement
Get a competitive rate, save on fees and access a 100% offset account plus redraw facility.
3.64%
3.64%
$0
$0 p.a.
70%
A low interest rate home loan with no application or ongoing fees.
3.65%
3.66%
$0
$0 p.a.
80%
Sharp interest rate and low fees
This special rate mortgage has no ongoing fees and offers flexible repayments. Save $595 in establishment fees before 30 September.
3.85%
3.85%
$0
$0 p.a.
80%
Flexible, low fee mortgage
Pay no application and ongoing fees with Macquarie Bank Basic Home Loan. Split and redraw facilities included.
3.65%
3.66%
$0
$0 p.a.
90%
Competitive interest rate and low fees. Available with a 10% deposit. Partial offset account attached (offset up to $15,000).
3.64%
3.64%
$0
$0 p.a.
70%
A basic variable home loan that offers a competitive interest rate with no application fees and no ongoing fees.
3.64%
3.79%
$0
$0 p.a.
80%
Apply online for this fixed rate, low-fee loan with redraw facilities and an optional offset account.
3.62%
3.62%
$0
$0 p.a.
95%
A low deposit mortgage with a competitive rate and plenty of flexibility. QLD residents only. Eligible borrowers can get a 15% discount on home and contents insurance for the life of their loan.
3.72%
3.74%
$0
$0 p.a.
80%
100% offset account and a 10% deposit option
Save on interest by taking advantage of a 100% offset account along with no ongoing fees or application fees.
3.70%
4.13%
$0
$395 p.a.
90%
Get this loan with a 10% deposit
Package your loan with an eligible credit card for discounts on rates and fees, and get a 100% offset account.
3.84%
3.82%
$0
$0 p.a.
80%
A fixed rate loan with free redraws, few ongoing fees. Apply online with a fast approval process.
3.89%
3.94%
$0
$0 p.a.
80%
Sharp fixed rate loan
Pay no application or ongoing fee and borrow up to 80% LVR.
3.74%
3.74%
$0
$0 p.a.
80%
A basic owner-occupier home loan with a low variable rate that requires a 20% deposit.
3.59%
4.74%
$0
$395 p.a.
90%
Get this package loan with a 10% deposit
Enjoy a competitive rate with no application fee for this package loan.
3.79%
3.79%
$0
$0 p.a.
80%
Minimal fees and a 100% offset account
Access an offset account and pay no application or ongoing fees on this special variable rate for owner-occupiers.
3.88%
3.89%
$0
$0 p.a.
90%
Low deposit, low rate mortgage
Save on interest with a free 100% offset account and buy your property with just a 10% deposit.
3.74%
3.74%
$0
$0 p.a.
110%
Borrow up to 110% with a guarantor
Pay no deposit or LMI and get a discounted rate with this family pledge loan. Requires a family member to act as guarantor. NSW, Qld and ACT only.
3.76%
4.15%
$0
$395 p.a.
90%
Discount special offer with a 100% offset account
A high maximum LVR home loan with redraw facility and additional payments. Get this mortgage with a 10% deposit.
3.74%
3.79%
$600
$0 p.a.
80%
Low interest rate for new customers
Family guarantee option available. Enjoy flexible repayments and a low minimum loan amount.
3.81%
3.81%
$0
$0 p.a.
80%
A home loan with a competitive rate and plenty of handy features. This product comes with a 100% offset account.
3.64%
3.69%
$600
$0 p.a.
80%
Low fees and low interest rate
A competitive variable rate for borrowers with a 20% deposit or more. Guarantor option available.
4.04%
4.07%
$0
$0 p.a.
90%
Get this loan with a 10% deposit
For a limited time, pay no application or settlement fees. You can also take advantage of a free redraw facility.
3.97%
3.99%
$0
$0 p.a.
80%
Competitive investment package loan
Package your owner occupied loan with investment loan and receive a discounted investment rate. 100% offset account included.
3.72%
4.11%
$0
$349 p.a.
90%
10% deposit option available
Package your loan with other AMP products and save on rates and fees.
3.75%
4.00%
$0
$248 p.a.
70%
100% offset account included
Borrowers with a 30% deposit can get this competitive rate.
3.62%
4.49%
$0
$0 p.a.
80%
Get a competitive rate and avoid ongoing fees. This loan is only available to current and former employees of eligible Queensland government organisations.
4.09%
4.11%
$0
$0 p.a.
80%
Simple residential mortgage product
This variable rate loan keeps the features simple and fees low. This loan is offered by a 100% online lender.
3.89%
3.94%
$0
$0 p.a.
90%
Available with a 10% deposit
Borrow up to 90% of the value of the property you're buying, and pay no application fee.
3.68%
3.69%
$0
$0 p.a.
90%
Available with a 10% deposit
Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000.
3.93%
3.94%
$0
$0 p.a.
80%
Use your home equity with a low rate
A low-fee line of credit loan from an online lender. Unlock the equity in your home and make interest-only repayments with a competitive rate.
3.99%
5.17%
$600
$0 p.a.
90%
Available with a 10% deposit
Competitive rates for fixed for 3 years with redraw facility.
3.99%
3.99%
$0
$0 p.a.
70%
Save on fees with this investor mortgage
Investors with a 30% deposit can get this low rate loan to fund their property portfolio.
4.13%
4.14%
$0
$0 p.a.
90%
Available with a 10% deposit
Access a fee-free offset account and a special interest rate for investors.
3.83%
3.83%
$0
$0 p.a.
90%
Special discount rate
New customers can get a discounted variable rate and a fee-free redraw facility. NSW, QLD and ACT residents only.
4.24%
4.27%
$0
$0 p.a.
95%
Low deposit loan for investors
Buy a home with just a 5% deposit and get flexible repayment options and a redraw facility.
3.59%
4.14%
$395
$0 p.a.
80%
Competitive interest rate
A one year fixed rate offer with no ongoing bank fees.
3.89%
4.94%
$595
$0 p.a.
90%
10% deposit option available
Borrow up to 90% of the value of the property you're buying and pay no application or ongoing fees.
3.74%
4.01%
$395
$0 p.a.
80%
Lock in a low rate for 3 years
A competitive fixed interest rate product with no ongoing bank fees.
4.18%
4.18%
$0
$0 p.a.
80%
Competitive investment mortgage
Investors get a 100% offset account and pay no application or ongoing fees on this loan from an innovative online lender.
3.99%
4.86%
$0
$0 p.a.
80%
Fix your rate for 2 years
Access a fee-free 100% offset account and pay no application or ongoing fees.
3.99%
4.62%
$395
$0 p.a.
80%
Flexible fixed investment loan
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
3.70%
3.70%
$0
$0 p.a.
70%
You need a 30% deposit to get this mortgage
Get a discount for keeping your LVR at 70% or below with this innovative online lender.
3.99%
3.99%
$0
$0 p.a.
80%
Special discounted interest rate
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
3.69%
4.54%
$0
$395 p.a.
90%
10% deposit option available
A fixed rate loan with a 100% offset account and the option to make additional repayments. Loans over $150k receive a discounted rate. NSW, QLD and ACT residents only.
4.29%
4.26%
$0
$0 p.a.
95%
A competitive 3-year fixed rate loan with a high max insured LVR.

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UBank UHomeLoan Variable Rate - Discount offer for Owner Occupiers, P&I Borrowing over $200,000

Take advantage of a low-fee mortgage with a special interest rate of just 3.59% p.a. and a 3.59% p.a. comparison rate.

loans.com.au Essentials - Variable (Owner Occupier, P&I)

A competitive interest rate home loan with interest only options. Interest rate 3.64% p.a.
comp rate of 3.66% p.a.

Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤90% ($150K+ Owner Occupier)

Loans over $150k get a discount off an already low fixed rate. Available for NSW, QLD and ACT residents only.

Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150k+ Owner Occupier, P&I) Discount 1

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