How much can I borrow

How much can you borrow with a home loan? Find out how to qualify for a mortgage and how much you can afford to spend

Find out how much you can borrow for a home loan?

When considering mortgages, “how much can I borrow?” is one of the first questions most homebuyers ask. An excellent way to make sure you qualify for a mortgage is to concentrate on what you can comfortably afford because that’s pretty much how lenders assess home loan applications.

Legally, mortgage providers are responsible for making sure you can repay your home loan, so they calculate your borrowing power based on several different factors, which we’re going to look at here.

It’s not quite as simple as deducting your expenses from your income. What you buy, who you are, and the way you live all come into play, plus buying a home comes with associated costs you’ll need to consider. You’ll be in a better position to enjoy a successful home loan application once you understand precisely how lenders work.

Once you understand how different home loan features affect the cost of borrowing, you’ll be in better shape to compare home loan options that meet your needs and budget.

How do I calculate how much can I borrow?

The first step you should take in the home loan process is to work out what you can afford to spend, not so much how much you can borrow with a home loan. Before we get into the complexities of income, expenses, and spending, let’s look at the two most crucial components of your future home loan: the principal and deposit.

Your loan principal is how much you borrow. So, it’s the value of your home less the second factor in this calculation – your deposit or down payment. The difference between those two factors dictates your Loan to Value Ratio (LVR). That’s an important factor in how a lender views your application, plus it affects how affordable your loan will be from the outset. Here’s how LVR works:

Home Value Deposit Loan Principle LVR
$250,000
$100,00
$150,000
60%
$75,000
$175,000
70%
$50,000
$200,000
80%
$25,000
$225,000
90%
$12,500
$237,500
95%

The more you borrow, the more interest you need to pay and the more expensive your mortgage will be. There’s no avoiding that fact, so it’s a great place to start. The single best way to make your home loan more affordable and maximise your chances of qualification is to save up for a bigger deposit and reduce your LVR.

Here, we’re going to estimate what you can afford by using your savings initially. Using at least a 20% deposit is sensible. That keeps you from rising above 80% LVR. Not only will lenders regard that favourably but you’ll avoid paying [lenders mortgage insurance (LMI)]. Homebuyers who borrow more than 80% of the value of their property are required to pay LMI. It’s designed to protect the lender against defaults and gets worked out as a percentage of the total purchase price. It’s worth remembering that if you add the cost of your LMI to how much you borrow, that’s going to impact your total buying power – because it doesn’t go towards purchasing your home.

Let’s say you’ve saved $50,000 so far. That gets you a $250,000 mortgage with 80% LVR, and let’s assume you get offered a 5% interest rate. Can you afford to repay that comfortably?

Principle Term Monthly Total Interest Total Cost
$200,000
25yrs
$1,169.18
$150,754.02
$350,754.02

You can begin to answer that question by looking at what you earn and spend. Your disposable income is the other thing you need to consider when you first ask yourself, “how much can I borrow on a home loan?” That’s simply a basic calculation you can do to determine what you’re free to spend each month. Use your own figures here to figure out how much you can afford for a home loan.

Deduct all your expenses from your monthly pay and what you’re left with is what lenders call disposable income. It’s not the definitive figure home loan providers will use to assess your application, but it’s a decent starting point. Include everything, from current debts to groceries to utility bills, running your car, and rent. Allow a fair bit of wiggle room for unexpected events and costs before you apply for a home loan.

What factors can influence how much I can borrow?

Your borrowing power is what lenders sometimes refer to when they assess how much you can afford on a home loan. Apart from disposable income, your loan amount, and your deposit, several factors influence that:

  • Available credit: Remember, lenders won’t look at the balance of your credit cards; they’ll use the upper credit limit the card issuer allows.
  • Credit history: Home loan providers scrutinise your past record of borrowing, and they’ll also use that to confirm how much existing debt you have. You can check your credit report once a year for free, and it’s often well worth the time and effort. Many reports contain outdated entries and errors that will significantly affect how a lender views your application.
  • Employment history: Lenders like to see stable work history. That means if you’ve been in your job for a while, or even with the same employer, you stand a better chance of qualifying for a home loan.
  • Your assets: If you have additional assets, like a car, boat, or caravan, for instance, you can include that on your application. Investment properties, shares, and anything else of value should all be declared to the lender. Remember, however, that additional properties come with both value or income and expenses attached.
  • Joint applications: It’s worth noting that if you’re applying with a partner or spouse, lenders will check both your credit histories, income, and spending. You’ll need to double your efforts to make sure you both qualify for a decent interest rate and ultimately get approved.
  • Genuine savings: are savings you’ve accumulated over an extended period of time that the lender regards to be real. That’s different from just putting a lump sum in the bank before applying. Genuine savings signal planning and readiness to take on a home loan.

How can I maximise my chances of approval on my home loan?

Follow Savvy’s simple steps to improve your overall borrowing power before you apply for a home loan

Top Tips on what upfront costs you'll have to budget for

It’s not all about the loan and deposit. You’ll need to plan for the additional upfront costs of buying a home

Stamp duty

It’s essential to consider stamp duty when you’re budgeting and saving for buying a home. Stamp duty becomes due when the sale on your property is completed and usually gets paid as part of the conveyancing process. It’s not like LMI, so you can’t capitalise stamp duty (add it to your mortgage) – it needs to be paid in a lump sum. How much stamp duty you need to pay depends on the value of your home and the state you live in.

Title transfer and search fees

These are fees to make sure the title on your new property is legitimate and that transferring it to you will pose no legal problems or leave you out of pocket.

Mortgage application fee

Many lenders charge some upfront costs to set up your home loan. You may be able to add these to the loan principal, but don’t forget that can alter your LVR.

Conveyancing costs

Solicitors charge fees to take care of the complicated process of making sure your home purchase goes smoothly, and titles get transferred legally and correctly.

Lenders Mortgage Insurance (LMI)

LMI will be required if you fall short of paying at least a 20% deposit, so your LVR rises above 80%. It can be pretty costly, representing a few percent of your property’s total value. Again, remember that adding LMI to your home loan will change your LVR.

Property valuation costs

You’ll need to pay a fee so the mortgage provider can value your new home. That gets done primarily because the lender needs to know it provides adequate security for your borrowing.

Questions people frequently ask about how much they can borrow

Still got some questions? Find out what other factors affect how much you can borrow in Savvy’s home loan FAQs

Does having dependents affect how much I can borrow?

Kids cost money, so lenders will regard them as being an expense for the purposes of assessing your home loan application.

How many times my salary can I borrow?

Lenders differ, but a good rule of thumb is 4 to 4.5 times your current salary. Remember, your wages aren’t all your lender will consider. Mortgages are a huge financial commitment, so be prepared for the provider to scrutinise every aspect of what you earn, spend, and owe.

What other forms of income can I declare?

Your salary might just be one form of income. Remember to include any income from a rental property, share dividends, and any money you earn from a side gig, no matter how little.

Will a joint home loan application affect how much I can borrow?

Although you’ll be pooling income, you also combine your liabilities, so it depends on each of your financial circumstances. You’ll need to put your heads together and figure out all your expenses, assets, and earnings.

Can buying investment property affect how much I can borrow?

Being an investor can help if you expect to earn from rental income, the property to gain value – or both. Remember, you’ll need to be realistic about how much it costs to run your investment, and don’t forget that investor home loans generally come with higher interest rates.

I have heard the term serviceability. What does that mean and will it affect how much I can borrow?

Loan serviceability is how your lender might refer to your ability to repay the mortgage. It’s essentially a measure of affordability based on what you earn, borrow, and spend.

What is an assessment rate?

This is another term you might come across. Most lenders don’t take it for granted that interest rates won’t rise in the future, so they apply a measure that stress-tests your ability to repay if the cash rate rises dramatically. That’s known as their assessment rate. For example, a lender would use a buffer (usually 2%) when determining affordability. So, if current rates are 2.5%, lenders will use an assessment rate of 4.5% when calculating serviceability.  This accounts for any future interest rate increases.