By Adam Parsons JP, B.Com, Dip FMBM, Senior Mortgage Broker and Principal, Aussie Lane Cove
“How much can I borrow?” is one of the first questions people ask when they start thinking about buying a home or investment property.
The answer is not based on income alone. Lenders look at your broader financial position, including your expenses, existing debts, credit limits, deposit and the type of property and loan involved.
Understanding your borrowing capacity before you begin looking at properties can help you set a more realistic price range. This is particularly useful in Sydney, where property prices can vary considerably between neighbouring suburbs.
How is borrowing capacity calculated?
There is no single income-to-loan formula that applies to everyone.
Two people earning the same salary can receive very different borrowing capacity estimates because lenders also consider factors such as:
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- Existing home loans, personal loans and car loans
- Credit card limits
- HECS-HELP and other education debts
- Number of dependants
- Regular household and living expenses
- Employment type and income structure
- Deposit and available savings
- Property value
- Proposed loan term
- Interest rates
- Credit history
For example, one couple earning a combined $180,000 may have fewer existing debts and lower household expenses than another couple on the same income. Although their earnings are identical, the amount each couple may be able to borrow could be quite different.
Your borrowing capacity is based on your overall financial position, not simply the amount you earn each year.
It can also vary between lenders because they may assess income, expenses and other commitments differently.
What do lenders consider?
When reviewing a home loan application, lenders generally focus on three main areas.
1. Your income
Your regular salary or wages will usually be the starting point.
Depending on your circumstances and the lender’s policy, other income may also be considered, including:
- Bonuses and commissions
- Overtime
- Rental income
- Investment income
- Self-employed business income
- Certain government payments
Not every type of income is treated in the same way. A lender may only use part of your variable income, while self-employed applicants will generally need to provide additional financial documents.
This is one reason online borrowing calculators should only be treated as a starting point. They may not reflect how a particular lender will assess your full circumstances.
2. Your living expenses
Lenders also need to understand how much of your income is already being used to run your household.
This can include housing costs, groceries, transport, insurance, utilities, childcare, education, entertainment and other regular spending.
Your expenses can have a meaningful effect on your borrowing capacity. They also matter when deciding what level of repayment would feel manageable within your own budget.
The amount a lender may be prepared to lend is not necessarily the amount you will feel comfortable borrowing.
3. Your existing debts and credit commitments
Existing financial commitments can reduce the amount you may be able to borrow.
These can include:
- Credit cards
- Personal loans
- Car loans
- Existing mortgages
- Buy now, pay later accounts
- HECS-HELP and other education debts
Credit card limits are particularly easy to overlook. Even if you pay your balance in full each month, a lender may still consider the total available limit when assessing your application.
Reviewing your existing debts and unused credit facilities before applying can help you understand how they may affect the assessment. Any changes should be considered carefully based on your own circumstances.
How much should I borrow?
Knowing your maximum borrowing capacity is useful, but it does not automatically need to become your maximum property budget.
When working through what may be affordable, it is important to consider the full cost of owning the property, not only the mortgage repayment. Depending on the property, this may include:
- Council rates
- Strata fees
- Home and contents insurance
- Repairs and maintenance
- Utilities
- Ongoing living expenses
It can also be helpful to consider how your budget would respond to changes such as higher interest rates, reduced income or an unexpected household expense.
Leaving some room in your budget can provide greater flexibility than borrowing at the upper end of your assessed capacity.
Is borrowing capacity the same as loan approval?
No. A borrowing capacity estimate provides an indication of how much you may be able to borrow based on the information available at the time.
Formal approval will depend on a lender completing its assessment, verifying your financial information and reviewing the proposed property. Lending policies and interest rates can also change.
This is why it is worth understanding your position before making an offer or committing to a purchase.
Want to understand how much you could borrow?
A borrowing capacity assessment can provide a more personalised estimate based on your income, expenses, debts, deposit and intended purchase.
If you would like to understand how lenders may assess your position, you can book an appointment with me at Aussie Lane Cove. We can review your circumstances and talk through the options that may be available.
Book an appointment with Adam at Aussie Lane Cove
Adam Parsons JP
Senior Mortgage Broker and Principal, Aussie Lane Cove
0400 530 840 | [email protected]
Adam Parsons | Credit Representative 405144 | Aussie is the trading name for Lendi Group Distribution Pty Ltd (ACN 105 265 861, Australian Credit Licence 246786). This information is general in nature and does not constitute credit advice. Your circumstances should be reviewed before any loan is arranged.
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