How much can I borrow?
How much you can borrow depends on several factors, including the type of lender and loan product you're looking at.
Your borrowing power is a critical number to know because it gives you an estimated amount you can spend on a property and what your loan repayments would be. However it's important to know, how much a lender will lend you and how much you can afford to spend may be two different numbers.
What determines the amount you can borrow?
Your income is the most important factor in to calculate your borrowing capacity. The general rule of thumb is not to let your repayments exceed more than 30% of your after-tax salary.
Your regular expenses and debts
With fewer expenses, lenders and banks will have more confidence in your ability to make regular loan repayments. In the lead up to your loan application it may be worthwhile to trim any unnecessary expenses you have.
The added cost of having dependents will impact how much lenders will lend you. In other terms, lenders want to make sure you'll be able to comfortably afford your loan repayments and the costs involved with your family.
There’s a number of fees and charges that come along with purchasing a property like Stamp Duty, loan establishment fees and legal costs. These costs and other can impact how much you can borrow. Read more about what fees and charges you can expect to pay when buying a property here.
Savings and equity
The amount of savings and/or equity you have in an existing property can substantially improve your borrow power. This is a huge advantage for those purchasing a second home or an investment property.
Consider the future
It’s worthwhile to plan your purchase around your future financial goals and cash flows. Many buyers are more comfortable purchasing closer to their maximum borrowing capacity if they are anticipating their income to grow or for a windfall of cash.
Shop around to find your maximum borrowing capacity
Your borrowing capacity will differ from lender to lender and it's important to shop around. Banks and lenders all use different criteria to calculate how much they will lend you: as an example, some banks have different formulas to calculate the costs of dependents . Ultimately, your borrowing capacity between two banks could be thousands of dollars - the difference between purchasing your dream house or settling for your second favorite.
Tips to maximise your borrowing power:
- Pay off and close any credit card or overdraft facilities
- Do the sums and stick to a budget to improve your deposit and savings history
- Pay off outstanding term debts (e.g. personal loans).
- Use a mortgage broker to find out which lender will offer you the most competitive borrowing capacity.