How Much Can I Borrow for a Home Loan?
How much you can borrow for a home loan depends on what a lender believes you can comfortably afford to repay, not what you think you can afford. Lenders use a formal assessment process that considers your income, expenses, existing debts, and the buffer they are required to apply against future rate rises. Understanding this process helps you set realistic expectations and take steps to strengthen your position before applying.
The Serviceability Assessment
Lenders assess whether you can service the loan, meaning whether your income is sufficient to cover repayments under a stressed rate scenario. Most lenders add a serviceability buffer of 2% to 3% above the current interest rate when calculating affordability. If the actual rate is 6%, they assess your repayments at 8% or 9%.
This buffer is designed to ensure you can still afford repayments if rates rise after you take out the loan. It means you will typically be approved for a lower amount than a straightforward calculation at the current rate would suggest.
Key Factors That Affect Borrowing Capacity
Gross income: Higher income directly increases borrowing capacity. Lenders typically count employment income, self-employment income, rental income, and government payments at varying percentages.
Living expenses: Lenders assess your declared living expenses and compare them to benchmark figures. If your declared expenses are low, many lenders will use the higher of the two. Reducing discretionary spending before applying can modestly help.
Existing debts: Credit card limits, personal loans, car loans, and other financial commitments reduce your borrowing capacity, even if you rarely use a credit card. Reducing or closing unused credit facilities before applying can increase what you are able to borrow.
Number of dependants: Each dependant increases your assessed living expenses and reduces borrowing capacity.
Loan term: A longer term reduces monthly repayments and increases borrowing capacity. However, you pay more total interest over the life of the loan.
Deposit and LVR
A larger deposit reduces the loan amount required and improves your LVR (loan-to-value ratio). Borrowers with an LVR of 80% or below typically access better rates and avoid lender's mortgage insurance (LMI). Where LMI applies, it adds to the cost of the loan and is typically capitalised into the loan amount.
How to Increase Your Borrowing Capacity
- Pay down or close unused credit cards and personal loans before applying.
- Reduce discretionary spending in the months before application.
- Build a larger deposit to reduce the loan amount needed.
- Apply with a co-borrower whose income strengthens the combined application.
- Choose a longer loan term to reduce the assessed monthly repayment.
- Improve your credit score to access lenders with more generous assessment criteria.
Pre-Approval
Getting pre-approved before searching for a property gives you a realistic sense of your budget and demonstrates to sellers that you are a serious buyer. Pre-approval is typically valid for 90 days and subject to satisfactory property valuation. It is not a guarantee of final approval, which depends on the specific property you purchase.
Key Takeaway
Your home loan borrowing capacity is determined by affordability at a stressed rate, not just your income. Understanding the assessment criteria and addressing the factors within your control, particularly existing debts and deposit size, can meaningfully increase what a lender is willing to offer.