Borrowing Power Calculator

Easily discover your true home loan borrowing capacity with Savvy’s simple-to-use calculator

Last updated on May 17th, 2022 at 02:57 pm by Cate Cook

Home loan borrowing power calculator

If you’re thinking of applying for a home loan, understanding how much you may be permitted to borrow is one of the first steps you need to take before submitting your application.  This is why you should use Savvy’s free online borrowing power calculator today to help you with your application.

Home loan borrowing power explained

How do I use the borrowing power calculator?

With just a few simple inputs, the borrowing power calculator will give you a clear indication of how much you may be able to borrow to buy your dream home or car. 

To use the borrowing capacity calculator, you’ll first need to decide if the loan application is to be a joint or a single person application.  If it is a joint application, you will need information about your own and your partner’s net (after tax) incomes.  Enter these details in the top left-hand section of the calculator, together with the number of dependent children you have.

Next, enter any other income you may have, such as interest from savings or investments, rental income, government payments or child support.  When you’ve entered all your income from all sources, work out your average living expenses per week or month.  Use the green arrow buttons to change the frequency from weekly to fortnightly, monthly or annually.

Add in any existing car loan repayments you may have and details of your credit card debt and credit limits, as well as any other outstanding debts you may have.  Think about the loan term you may be interested in, and research the interest rates which are currently being offered.

Once you’ve entered all of these relevant details, click anywhere on the home loan borrowing calculator page to see the results.  It’ll tell you how much you’re likely to be able to borrow and what the repayments will be if you do borrow that sum.

What is borrowing power?

Borrowing power is the amount of money a lender may be prepared to loan you.  It’s based on a snapshot of your whole financial situation, including your income, the size of your deposit, your existing debts and commitments and how many assets you own.

There isn’t one single standard formula that all lenders use to determine a customer’s borrowing power, as all lenders assess a person’s financial situation slightly differently.  However, you can use Savvy’s borrowing power calculator to give you a better idea of the kind of sum most lenders may be willing to loan you.  You should use this sum as a general guide only to give you a ballpark figure and help you assess whether your expectations for a loan amount are realistic.

Of course, just because a lender says they are prepared to lend you a certain sum doesn’t mean you have to borrow up to the full limit of your borrowing power.  Some people prefer to look at the monthly repayments and calculate how much they’d have to fork out per month if their home loan interest rate went up by 3% p.a.  If the figure looks affordable with 3% p.a. added to the monthly repayment amount, it can receive the green light from most conservative borrowers.

What factors will affect my mortgage borrowing power?

 It’s important to understand the variables which can affect your borrowing power, which include:

Employment situation and stability

Your income is one of the first things that a potential lender will look at when assessing your mortgage borrowing capacity.  However, it’s not only how much you actually earn that matters; it’s your broader employment situation and stability that a lender is interested in. 

Permanent employment is considered safer than casual by lenders and the length of time you’ve been in your job is also an important factor.  Some lenders specify you must have been with your current employer for a set period of time, which is usually longer than three months (although this will be longer for casual and self-employed workers).

Total household income

A lender will also look at your partner’s income and any other forms of income you may have, such as interest from other property or investments, interest on savings, government benefits such as Centrelink payments and any child support which is received.

Everyday expenses

These may include your utility bills, the cost of phones and internet and everyday living expenses such as food and groceries.  Many lenders have standard allowances which they apply to these various categories, based on processing hundreds of thousands of loan applications. 

 Other debts

These may include any other loans or mortgages you may have, which will include store credit cards and any other lines of credit (such as ‘buy now, pay later’ deals).   

 Your assets

This may include any property you already own, plus vehicles including cars, trailers and caravans.  Also, lenders will include any cash savings, investments and term deposits you may own.

 Deposit available

The amount of deposit you’re able to offer to secure your loan will make a big difference to the amount you’ll be able to borrow.  It goes without saying that the larger the deposit you offer, the better your chances of being approved for your home loan and the lower interest rates you’ll be eligible for.  The home loan industry standard deposit is 20% of the total purchase price.  If you’re able to offer more than 20%, you may be eligible for the lowest interest rate loans available.  If you don’t have 20%, you may have to pay Lenders Mortgage Insurance if you want to get a loan. Increase your borrowing power by offering as much of your savings as you’re able to afford. 

 Proof of regular savings

If you can provide proof of regular savings, this will count strongly in your favour when your loan application is being assessed.  These savings may be in the form of regular deposits into a savings account or offset account, or other proof that you’ve put aside money on a regular basis to save up for your deposit or to accumulate a nest-egg.  

 Credit history

Your credit rating is an accumulation of all your financial transactions over the past five to ten years.  All the loans you’ve ever applied for or paid off will be recorded, along with any store or credit cards you have.  Any loan applications that have been rejected or denied will also be visible to lenders on your credit report.  The higher your credit score, the safer you’ll be considered to be by your lender, which gives you the best chance of getting approved for the amount you need.

What is disposable income and how does it affect my borrowing power?

Disposable income is the money you have left from your wages after your basic living expenses have been taken into consideration.  It’s the money you have left to spend once you’ve paid your basic bills.  The more disposable income you have, the greater your borrowing power, because you’ll be able to afford more on your loan repayments.

The way lenders calculate your borrowing power takes into consideration your income versus your debts and living expenses. If you summarise what’s coming into your household as income, and then subtract all your living expenses and basic utility bills such as gas, electricity, phone and internet, you’ll get a good idea of your disposable income. You can use Savvy’s budget planner to work out exactly how much your current household commitments are.

Ways to increase your disposable income: ​

Pay off or pay down existing debts

Your borrowing power will increase if you’re able to pay off any existing debts you have before you apply for a home loan.  Start with the debts on which you pay the highest interest rate, and use any spare money you have to aggressively pay them off.  If you have multiple small debts, such as credit cards and personal or payday loans, you may be better off refinancing to consolidate all your debts into one larger loan, which could come with a lower interest rate and fewer administration fees than multiple smaller debts.

Restructure your existing debt

If you can’t pay off your existing loans completely, it is possible to increase your overall financial strength by restructuring your existing debt.  This could mean comparing personal loans with Savvy to find one with a lower interest rate.  It might involve comparing the different credit card offers available, and transferring your credit card debt to a card that has a zero interest rate on balance transfers.  It could involve changing your car financing to a loan with a lower interest rate.  Savvy can help you compare many financial products to find products that offer the best value and lowest interest rates.

Increase your basic pay

It’s worth considering whether it would be possible to increase your basic pay. Could you work longer hours or take on additional jobs? Could you change the hours of your shifts so you get paid more overtime? If you’re part-time, could you increase your hours to become a full-time employee?  Is there any scope for you to apply for a promotion that pays a higher wage?  Or, could you get a second job or develop a side-hustle to earn more income?  Have you got a hobby you could turn into a money-earning small business?  For example, if you’re a keen weekend sportsperson, could you attend a course to get your referee’s ticket, and then earn extra money from refereeing matches?

All these suggestions could help you improve your borrowing power by increasing your household income or decreasing debt. Lenders may not consider your side-hustle to be a source of permanent additional income, but you could use the extra money to pay off existing debt more quickly. This would increase your financial position overall by having less debt to offset your standard income.

Are there other ways to reduce the deposit I’ll need to pay?

Most lenders require you to come up with a deposit of 20% of the value of the property you wish to purchase.  In many circumstances, if you have less than a 20% deposit, you’ll be required to pay Lenders Mortgage Insurance (LMI). However, there are circumstances where you’ll be able to get a home loan with less than a 20% deposit and, in some cases, not have to pay LMI.  Some of the ways you can work around the 20% deposit requirement are:

  • First homeowner assistance

The government’s First Home Loan Deposit Scheme (FHLDS) assists eligible first home buyers by providing a deposit guarantee of up to 15%, meaning the borrower will only need to find a 5% deposit and won’t need to pay LMI.  This government guarantee can save first homeowners thousands of dollars in LMI and reduce their deposit burden.  You may also be able to put your First Home Owner Grant (FHOG) towards your deposit if you find yourself short on the 20% deposit you’ll need.

  • Preferred occupations

Traditionally, doctors and lawyers were treated favourably by the big banks, who saw those working in these professions as having a steady, reliable high-income stream.  Such low-risk professionals were often approved for loans where they were required to provide less than a 20% deposit.

However, with the increase in competition between mortgage lenders (brought about by online banks), the list of professionals who are eligible for these 90% LVR loans is growing.  It now includes a wide range of health care professionals such as nurses, physiotherapists and pharmacists, and even more workers in the legal and financial professions such as law clerks, conveyancers, accountants, mortgage brokers and financial advisors.

  • Joint and inter-generational loan applications

As blended and extended families make up a higher proportion of Australia’s population, so has the nature of loan applications changed too.  Instead of the traditional ‘Mum and Dad’ standard mortgage, many borrower combinations now consist of extended family members applying together, such as parents and children, two or more siblings, aunts and uncles and more. 

By having two, three or even four full-time income earners in the joint application mix, the risk to lenders is significantly reduced.  Joint loan applicants will still need to provide a 20% deposit to avoid LMI (either in the form of cash or equity) but this is often easier when several parties are contributing to it.  This arrangement is different from a guarantor as each co-applicant’s income is factored into affordability calculations, whereas guarantors only provide their existing home equity to help secure the home loan.

Top tips for increasing your borrowing power

Stay in the same job

Stable income is important to lenders, so it’s not a good idea to change jobs just before a loan application.  You need to have been employed in the same job (or in the same industry) for at least three to six months prior to a loan application.

Keep the same email address and phone number

Changing email addresses and phone numbers frequently indicates to lenders that you may have an unstable lifestyle, so it is far better to keep the same phone number, email address and physical living address for as long as possible prior to applying for your new home loan.

Reduce the limits on your credit cards

Even if you pay off your credit cards each month, the credit limit on your credit cards contributes to your overall debt and will reduce the amount you’re able to borrow.  Therefore, before applying for a home loan, it’s always best to reduce your credit cards to the lowest limit possible and pay out or cancel any other store credit or lines of credit you may have acquired over the years.

Pay off any debts you have

Your borrowing power will increase if you’re able to pay off any existing debts you have before you apply for a home loan.  Start with the debts on which you pay the highest interest rate.  If you have multiple small debts, such as on credit cards, you may be better off refinancing to consolidate all your debts into one larger loan, which may have a lower interest rate and less administration fees than multiple smaller debts.

Apply for a loan with a family member as guarantor

Asking a close family member to go guarantor for your new loan can increase your borrowing power dramatically. It could also mean you qualify for home loans which require a smaller deposit, or it could save you the cost of paying for Lenders Mortgage Insurance.

Pros and cons of asking a family member to act as a guarantor

PROS

Could allow you to borrow more

Having a guarantor could allow you to borrow more money to help you buy your dream house.  The added security of having a guarantor lowers the risk of your loan so you may be approved to borrow a higher amount.

Say goodbye to LMI

With a guarantor, you may not have to pay Lenders Mortgage Insurance.  This is because a guarantor may provide the equivalent of more than a 20% deposit, which could save you thousands of dollars.

Get a lower cost loan

Having a guarantor may enable you to look at lower cost loans that have more stringent requirements, but come with a lower interest rate.  Such prime loans are normally only offered to borrowers with a high credit score or a guarantor with plenty of free home equity. 

CONS

Ties up your family member’s equity

If a close family member is prepared to act as guarantor for your home loan, this may result in their existing home equity being tied in with your home loan, which could mean you’ll have to refinance if they want to sell their home or downsize.

Relationship obligation

Asking a close family member to act as a guarantor for your loan can create a family obligation or present difficulties with other siblings or family members who may question why they were not offered the same opportunity.

A higher risk for older parents

Most home guarantors are parents who are wanting to give their children a good start in life.  However, if the parents are nearing retirement age, going guarantor for their children can present a high financial risk towards the end of their earning careers.

Common queries about home loan borrowing power

If I apply for a loan with my partner, will both of our debts be taken into account?

Yes – if your application is a joint one, the financial position of both parties will be taken into account when assessing your application.  However, if you’re applying alone, your partner’s financial position will not be as important.

Is there a debt-to-income ratio that is accepted by most lenders?

Your debt-to-income ratio (DTI) is your total debts and liabilities divided by your gross (before tax) income.  For example, take a couple who are teachers and who both earn $65,000 per year, therefore giving them a gross income of $130,000.  They each have a credit card with a $5,000 limit, and they have a mortgage of $480,000.  Their total debt is $490,000.

To work out their debt-to income (DTI) ratio:

490,000 ÷ 130,000 = 3.77

Lenders prefer borrowers to have a DTI ratio of below 6, and ratios of 7 or more may be referred to a lender’s credit department for further review.

What's the difference between gross salary and net salary?

Gross salary is the amount you earn before income tax and any other deductions are taken out of your pay, while net salary is what you take home after these deductions have been applied.

Will the interest rate on offer affect my borrowing power?

Yes – the higher the interest rate, the higher the monthly repayments you’ll be making.  The size of the repayments you’re able to afford will be determined by how much you earn, and what your living expenses are.  Therefore, the lower the interest rate, the more you will be able to borrow.

How much does my age affect my borrowing power? 

Your age isn’t a critical factor which affects your borrowing power – it’s more dependent on your income.  The minimum age to get a home loan in Australia is 18 years of age.  There’s no maximum age limit for approving a home loan, provided you can show that you’re capable of servicing it comfortably over the whole term.  For example, people who are in their 60’s can apply for a home loan as long as they have an appropriate income stream post retirement to support their loan repayments.

Do all lenders calculate borrowing power the same way?

Whilst all lenders may use similar calculations to assess your financial position, the loan cut-off values and criteria for loan approval can vary widely.  The big banks tend to be more conservative with their lending criteria, whilst some online lenders specialise in approving loans for people with low credit ratings or a history of bankruptcy.  That is why loan comparison with Savvy is an important step in your home loan journey: taking in as many options as possible will help you make a more informed choice on which is the best for you.