What determines your borrowing capacity for a home loan?

When considering buying a property, one of the first things you need to determine is your “borrowing power”. Knowing how much you can potentially borrow will help you find properties that fit your budget.

In this guide, we’ll look at how to calculate your borrowing capacity and what lenders look for when determining the size of a loan. home loan they will offer you.

Borrowing power is the amount of money a bank will be comfortable lending you based on your financial situation. The higher your borrowing power, the more expensive a property you can afford.

So, when considering buying a home, be aware that having a large deposit or owning a few assets will not secure your home loan. There are a few more things to think about. Let’s look.

The amount you can borrow varies from lender to lender, but most banks consider the same factors to calculate your borrowing capacity.

We have highlighted the main ones below:


A key factor is your income. The amount you earn has an impact on what you can afford in mortgage repayments. Of course, if you are buy a property with a partner or friend, your combined income will allow you to take out a bigger loan.

Generally, the higher your income, the less risk you pose to a bank.

Debts and living expenses when applying for a loan

Lenders will comb through your “accounts” to see if you are financially responsible. It is therefore important to avoid having large debts or falling behind on repayments.

Indebtedness may affect your ability to make future repayments and may reduce your total borrowing power. Similarly, high living expenses can also reduce your ability to borrow or cause your loan application refused.

Some debt and expense lenders examine in particular:

Credit history affects loan applications

Your credit history and the rating will give lenders an idea of ​​your repayment reliability. One of the main things they look for is whether your file has information about missed or late payments, whether it’s bills, credit card repayments, or another loan.

That’s why it’s wise to get a copy of your credit report before applying for a home loan. The better your credit score, the higher your chances of approval.

Initial deposit – how much can you afford?

The size of your to pay may affect the loan amount you receive.

Lenders are looking for evidence of real savingstherefore having a generous initial deposit (at least 20%) could help increase your borrowing capacity.

Your deposit will also help define your loan to value ratio, which will determine the overall amount you can borrow. Generally, most lenders prefer a 20% deposit (leaving 80% of the value to be paid back) and consider an LVR that tips more than 80% to be riskier. If your LVR is over 80%, you may have to pay lenders mortgage insurance.

Assets can help borrow a home loan

Assets such as a car, boat, investment properties or one stock portfolio can also help increase the amount you borrow. This is because these valuable assets prove to the lender that you can to register and invest money over a long period of time.

However, keep in mind that many debts from these assets could reduce your borrowing capacity.

Property value

The amount you can borrow may depend on the value of the property. First, a lender will make a property valuation then decide how much money he will lend you. If the property costs more than you can reasonably afford, your application may be denied.

A home loan calculator can give you an idea of ​​what you can borrow based on your current finances. Remember that the number you get from the calculator is an estimate and not a guarantee.

If you’re looking to get into the real estate market soon, check out Mozo’s home loan guides and advice. If not, start comparing home loanbelow.