How much can I borrow for a mortgage?

Finance Oct 18, 2023

6 min read

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A common question we get from borrowers is “how much can I borrow?”. If this is you, then read on.

The answer to this question depends on various factors, including your income, expenses, credit history, and the lending policies of the lenders at that point in time. It will also depend on whether you purchasing a property to live in or for investment purposes, as rental income and other add-backs can have an impact on how much you can borrow.

1. Assess Your Financial Situation

Before applying for a mortgage, it’s essential to take a close look at your financial situation. Your broker will ask you for your income, details of your expenses, and information on any existing debts/liabilities. This process includes:

a. Income: Your regular income, including your salary, bonuses, commissions and any other sources of income, is an important factor. Lenders consider this when determining how much you can borrow.

b. Expenses: Take a detailed inventory of your monthly expenses, including utilities, groceries, insurance, and other financial obligations.

c. Existing Debts: Lenders also consider your existing debts (and sometimes debt-to-income ratio), such as credit card limits, personal loans, HECS, and car loans, when you ask how much can I borrow.

d. The Loan-to-Value Ratio (LVR)

In Australia, one of the primary factors that determine how much you can borrow is the Loan-to-Value Ratio (LVR). LVR is the ratio of the loan amount to the property’s value. In general, the lower the LVR, the more favourable the terms you can secure. To avoid paying Lenders Mortgage Insurance (LMI) you’ll need a deposit of 20%. If you haven’t got that much and want to purchase anyway, there are options available to you.

Some lenders may accept a lower deposit with Lenders Mortgage Insurance (LMI), which is an insurance policy that protects the lender in case the borrower defaults on the loan. LMI can add to the cost of the loan. Our brokers can help you to understand what these extra costs might look like, as over a 30 year loan term this is usually quite minimal in terms of the impact on loan repayments.

2. How much can I borrow?

Many Australian lenders and brokers offer online borrowing power calculators that can help estimate how much you can borrow based on your income and expenses. These calculators can provide a rough idea of your borrowing capacity, but keep in mind that they are just starting points. To get an accurate assessment, it’s recommended to consult with a broker – the reason being the online calculators don’t take into account your full situation. Borrowing power can change across each of the banks depending on their credit policy, your personal situation and the loan amount you require.

3. Credit History

Your credit history plays a critical role in the mortgage approval process. Lenders use your credit score and history to assess your creditworthiness. A good credit score can help you qualify for a larger loan amount and secure more favourable interest rates. Make sure to review your credit report and address any issues before applying for a mortgage.

4. Employment Stability

Lenders also consider your employment history and stability. A consistent job with a steady income is viewed favorably by lenders. Self-employed individuals may need to provide additional documentation to prove their income, business profitability and trajectory.

5. Interest Rates and Loan Terms

Interest rates and loan terms will impact how much you can borrow and the overall cost of your mortgage. As interest rates fluctuate, they can influence your monthly repayments. Choosing between a fixed-rate and variable-rate mortgage will also affect your borrowing capacity.

6. Seek Professional Advice

Navigating the Australian mortgage market can be complex, and lending policies can change. To get a clear understanding of how much you can borrow for a mortgage, it’s advisable to consult with a mortgage broker (like us!). We have up-to-date knowledge of the lending market and can help you find the best mortgage product to suit your needs. Our brokers are also great at helping you work out which lender is going to be suit your circumstances, particularly if there is some complexity to your situation.

Ways to boost your borrowing power

Knowing what the lenders are assessing you on helps you to understand how you can increase what they will lend to you. Here are Vincent Moore’s top ways of improving your borrowing power:

  1. Reduce debt is the best one. Reducing credit card limits is such an easy one to do (and can often cost nothing) or paying out a loan with not much owing but with huge repayments can increase capacity hugely.
  2. Increase income. Much harder – asking your boss for a pay-rise is not always easy. Some people look at side hustles which can be a good option although is not for everyone. If you establish a side, most banks need to see two years’ proof of income before they will use it. So this isn’t going to be a quick solution.
  3. Buy with a partner. This might seem silly but purchasing with a partner is often a good solution. It’s obviously not for everyone but it’s best for some clients to wait until they are in a position where they are comfortable to buy with a partner as it might double (or more) their borrowing capacity.
  4. Reduce living expenses. If someone’s living expenses are very high, then reducing these over a couple of months could allow them to borrow significantly more. Ways you can reduce expenses include things like asking for a lower premium on your insurance (home/car/health) or swapping energy providers to a lower cost option. You can also save money with rewards points and programs. Eating out less is another easy win for lots of people as is deleting food delivery apps from your phone to take away the temptation.

It’s important to borrow within your limits and you don’t find yourself in a position where you can’t repay your debt, this is why borrowing capacity exists in the first place. We’re in no way suggesting you should attempt to borrow more than you can afford to repay. Having a budget and sticking to it is a great way of staying on top of your finances.

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