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:
You can also put some figures into a borrowing power calculator to get a quick estimate.
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.— Tom Goodwin, Commercial Content Editor
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.
Read our essential tips on how to increase your borrowing capacity
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:
Here are some quick examples:
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.
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.
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:
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.
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