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Use our comprehensive calculator to get a more detailed estimate of your borrowing power.
Hi, I’m Andrew Winter, host of Selling Houses Australia.
In my time as a property expert, I’ve learned just about everything there is to know about
home loans, as well as seen every possible mistake that a prospective homebuyer can
make when trying to get a home loan. And one of the biggest blunders you
can make is ballparking what you think you can afford to borrow, rather than
calculating your actual borrowing power. Your borrowing power is the maximum amount
you could mathematically afford to borrow from a particular lender based on how much you currently earn,
versus how much you currently spend on essential expenses like bills and groceries
what’s known as your disposable income. The difference between the two represents
the approximate amount you’d be able to put towards a home loan.
However, the calculations aren’t over yet, as interest rates will also play a part in
determining how much you can borrow. Why is that? Well, remember when I
said your borrowing power is based on how much disposable income you have?
The higher home loan interest rates are, the more of your disposable income in any given repayment
period would be eaten up by interest charges. That means less money to put towards the
principal component of a hypothetical home loan and, you guessed it, less borrowing power.
It’s also important to note that your borrowing power is unaffected by the size of
your saved deposit, and for good reason too. You could have a million dollars saved up,
but does that guarantee that you can afford to make the required repayments on
a multi-million-dollar home loan? I think not. If you want to increase your borrowing power,
the good news is that the solution is simple; earn more and spend less.
The bad news is that these two things are sometimes easier said than done.
You could also consider prioritising any existing debts you’ve got, as paying these off will free
up the money you were previously putting towards those debts and increase your borrowing power.
If you’d like to learn more about borrowing power, or calculate yours for yourself,
Compare the Market has got you covered. Their borrowing power calculator is quick,
easy, and free to use, and once you’ve figured out your borrowing power you
can start comparing home loans with confidence. So, start comparing today, and thank me later!
Our new and improved borrowing power calculator takes a closer look at your overall financial situation and aims to provide a more informed idea of your borrowing power. A report that’s tailored especially for you makes it “Simples!” to learn more about where you stand financially.
As General Manager of Money at Compare the Market, Stephen Zeller knows how important a firm understanding of one’s borrowing power is when house-hunting and trying to take out a home loan, so he’s passionate about making sure consumers know what their borrowing power is, and how borrowing power works. With that in mind, he has some borrowing power-related tips for you:
Even though you may pay down your credit card balance each month, lenders still consider your credit card limits and may assume it can be drawn to its limit the day after the loan settles. When applying for home loan finance, we can review your circumstances based on lower or no credit limits, which can significantly boost your borrowing power.
Don’t forget about student HELP (HECS) debts; these will be factored in when a lender is reviewing your borrowing power, and are one of the most common liabilities that are forgotten about. If you only have a minimal amount owing, you may want to consider paying this out prior to settlement, as it could positively affect your borrowing power.
There are many twists and turns when working out someone’s borrowing power, so you may want to speak with our Home Loan Specialists to help run through your circumstances in depth. Keep in mind that while it can be great finding out what your potential borrowing power is, you need to ask yourself if you would be comfortable having this amount of debt and whether you can reasonably make these repayments.
Your borrowing power is the amount of money a lender might potentially lend you based on your unique financial situation. Borrowing power is generally calculated using your regular income and living expenses, plus a few other factors.
These tend to include, but aren’t limited to:
Borrowing power is generally a more helpful yardstick than deposit size alone for prospective homebuyers. For example, you could have a $1 million deposit saved up, but that doesn’t mean you could afford to meet the interest repayments on a multi-million-dollar home loan.
Whereas borrowing power explicitly ballparks the amount you could potentially borrow, and the property values you could potentially afford based on how much you can afford to repay.
As we’ve mentioned, there are many different factors that can influence the amount of money a lender is willing to let you borrow. However, there are a few notable exceptions, including:
Many things can affect your borrowing power, so it may be worth going over some of the lesser-known factors that could have an impact on your borrowing power. These include:
You can generally increase your borrowing power by considering the factors that influence it and working on them individually. While some of these changes may not make an immediate difference, the impact on your borrowing power may prove greater than the sum of its parts over time.
Some steps you could take to increase your borrowing power include:
Your interest rate will influence the overall size of your ongoing mortgage repayments, making it one of the more important variables at play when calculating your borrowing power.
However, there is a second, indirect way in which a home loan’s interest rate can affect your borrowing power, and even your overall eligibility for any given home loan.
The Australian Prudential Regulation Authority (APRA) expects lenders to factor in something called a ‘serviceability buffer’ when assessing each and every home loan application they receive. The current minimum interest rate serviceability buffer is three percentage points, which means that lenders risk breaching their compliance requirements if they approve a home loan that the applicant can’t afford to repay a rate increase of three percentage points.¹
This measure is in place to protect borrowers against significant interest rate hikes, but it can cause a lot of headaches if you’re unaware of it and trying to get approval for a home loan.
So, keep that extra 3% in mind when you’re thinking about borrowing power. A certain home loan product may seem within your means based on your desired loan amount, but what if its advertised rate was 3% higher? Our home loan comparison tool will take this buffer into account when calculating your borrowing power.
N.B.: While we can provide you with an approximate idea of how much you may be able to afford to borrow, it should only be taken as a guide rather than a formal pre-qualification, as our borrowing power calculations don’t reflect the individual and varying serviceability standards of each lender.
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.