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
To use Finder's borrowing power calculator just enter the following details. If you're not sure of exact figures, use your best estimate:
Term. This is the length of the home loan (choose 30 years if you're not sure about this for now).
Interest rate. The home loan interest rate determines your repayment costs. If you're not sure, pick a rate from the loans table on this page.
Application type. Pick single application if you're on your own and joint if you're applying as a couple.
Income. The calculator asks for gross income, meaning how much you earn before tax and other expenses.
Expenses. Put in an estimate of your monthly debt payments. There's no expenses field but you can put an estimate of your monthly spending in the "other loans" field.
Dependents. If you have any children under the age of 18 put the number of children in this field.
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
$400,000
$80,000
$320,000
$1,919
$600,000
$120,000
$480,000
$2,878
$800,000
$160,000
$640,000
$3,838
$1,000,000
$200,000
$800,000
$4,797
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.
Your credit score -- among other factors -- has quite a big influence on your borrowing power. So before you start applying for loans, make sure you check it! It can help you assess whether now is the right time to borrow, or whether you need to take some other steps first.
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:
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.
More questions about how much you can borrow for a mortgage
You should never try to borrow more than you can comfortably afford to repay. Lenders all have their own idea of how much money they can lend you. So taking some simple steps to increase your borrowing capacity is not a bad idea.
Save a bigger deposit. The more you have saved the stronger your position.
Sort out your debts before applying. Debts count against your borrowing power, especially high-interest debts.
Cut back on your spending. A few months of careful spending will make you a stronger applicant. Draw up a budget and examine areas where you can cut back.
Check with several lenders before applying. Every lender will give you a different borrowing power estimate based on its own set of criteria and policies. It's a good idea to look at multiple options (don't apply, just enquire) as the difference between lenders can be tens of thousands of dollars.
Once you have a clear idea of your borrowing capacity it's time to look at your deposit, start searching for properties and research your home loan options.
You can't really apply for a home loan until you've bought a property, but you can apply for pre-approval.
One factor that isn't captured in a borrowing capacity calculator is your credit score. But when it comes to the application then your lender will look at this too. That's why it's a good idea to check your credit score before you apply.
Your borrowing power looks a little different if you run your own business. There are various types of business income that banks and lenders look at when considering borrowing capacity for a self-employed borrower. This includes personal and business tax returns and business activity statements.
If you're self-employed and can't easily prove your income, estimating your borrowing power is trickier. Talking to a lender directly might give you a clearer picture than using a traditional borrowing power calculator.
Every lender calculates things like your expenses differently, although they often use the same basic method. This means every lender gives you a different borrowing amount when you use their calculators.
Unfortunately banks keep their lending criteria a secret from borrowers. This means that while some borrowers can qualify for a loan, other borrowers might not qualify, even though they might look as promising as the other candidate.
Whether a lender will consider bonus income as part of your home loan application depends on the lender and the type of bonus you receive. In many cases, receiving bonuses can improve your borrowing capacity. In others it may be disregarded altogether.
Irregular bonuses are less likely to be assessed by a lender. If you can prove that you are paid bonuses or commissions on a regular basis and with a consistent amount, a lender will usually be satisfied to include it in your home loan assessment.
Overtime bonuses may be considered if you work in a specific profession, such as emergency service workers, or if you have a contractual agreement to work a certain number of overtime hours per month.
If you receive additional income off the back of an investment property, lenders will usually take a large portion of that income into consideration. It won't take the full 100% as it assumes some of the income will go towards maintaining the property or properties.
Income from investments like stocks and shares may also be considered by lenders depending on the payment structure and the type of investment.
Speak to your lender or mortgage broker to find out whether your bonus income will be assessed. Always be sure to provide evidence of your bonuses through tax returns, payslips and/or a letter from your employer.
Although you possibly can get a home loan while on maternity leave, lenders may see you as a riskier borrower because your income is reduced. This means you would not be able to borrow as much as you would on a full income.
There are a few things you could do to improve your chances of being approved:
Get documention from your employer detailing the terms of your maternity leave, such as the dates and your salary upon your return.
Save at least a 20% deposit.
Set a realistic budget and loan amount.
Talk to multiple lenders before applying. Too many rejected applications will look bad on your credit report, so be sure you get the answers before you apply.
Consider talking to a mortgage broker.
If you want to increase an existing home loan, you may be able to do this while on maternity leave. The increase would need to be a reasonable amount with a lender who will accept you and you can prove that you can afford it.
Once you reach the home loan application stage you will need to gather some information about yourself, your finances and the property you are buying. You can check out our detailed guide on preparing home loan application documents, but in general you will need:
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification.
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