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For many people, owning a home is tantamount to achieving the ‘Australian Dream.’
The good news is that house prices in Australia have fallen by an average rate of 2%, in part due to higher interest rates, according to the latest data from the Australian Bureau of Statistics (ABS).
However, higher interest rates also mean that borrowing money is comparatively more expensive than it was in the past, leading to some households experiencing mortgage stress.
Understanding the many factors that comprise an individual’s borrowing power is an essential first step in finding a forever home at the right rate for you.
You can read more about home loans in our comprehensive guide, but here is a general guide to help you estimate your borrowing power.
How Lenders Assess your Borrowing Power
Most lenders use a similar formula to calculate borrowing power. They work on the assumption that about 30% of gross income can be used to make loan repayments.
There is some variation about the way expenses are assessed, with some lenders factoring in a larger buffer that reduces the overall amount that can be borrowed.
Your income
“Lenders look at income as a way of calculating a borrower’s ability to repay a loan,” says Justin Brand, principal at Brand Financial.
“They look at net income after tax to begin with, and then complete an analysis of expenses on lifestyle and other commitments like loan repayments. They’re looking for a surplus that allows the borrower to repay the loan and withstand some interest rate increases.”
Tax-free income of Family Tax Benefits A &B are usually treated as income if your children are under 11. Other tax-free income is assessed on a case-by-case basis.
Bonuses
Simply by their nature, bonuses are not guaranteed to be paid—which is why lenders typically ask for a two-year history of bonuses. Some will exclude bonuses altogether.
Rental income
Rental income from investment properties is considered a form of income, although lenders will deduct 20% of the total to factor in the cost of repairs and council rates.
Credit history
A mortgage applicant with an excellent credit score is more likely to be approved for a home loan than someone with a poor credit history. The interest rate is likely to be lower as well.
Employment history
Lenders want to see evidence of a stable income being earned, which is why most require that an applicant have been in their current job for at least three months and have completed any probationary period. A steady period of full-time work with a single employer will be viewed favourably.
Being self-employed is not an obstacle to obtaining a home loan.
“Lenders will generally require two years of income history from someone who is self-employed—they need to have been in business for a full two years. A small number of lenders will consider less time,” says Brand.
Your deposit size
A typical house deposit is 20% of the total price of the property, however many lenders will accept a deposit as low as 5%. The Family Home Guarantee provides for a deposit of just 2% to eligible applicants and is designed to help first home buyers enter the market.
The loan-to-value ratio is known as ‘LVR’ and it is an acknowledgement by the lender of the risk of the value of the home decreasing.
“Most lenders are comfortable lending up to 80% of the value of the home,” says Brand. “Above that and you’re likely to pay lenders mortgage insurance, which is a one-off cost that protects the lender from the risk of you not repaying the loan. You are also likely to pay a higher interest rate as your loan increases in proportion to the value of the property.”
A smaller deposit means borrowing more money and therefore paying more interest over the long-term. That said, it puts you on track to owning your home outright sooner than if you wait to save up a bigger deposit. This is a benefit worth considering.
Assess your Expenses
A lender will look at all the expenses that a mortgage applicant must cover as a way of determining how much surplus there is left over for repaying the home loan.
Debts
An existing car loan or another mortgage is regarded as a current liability and a form of debt.
“If you have a loan, a lender will look at your current repayments and take that off your total net income before it assesses your ability to repay the new loan,” explains Brand.
Credit cards or BNPL
Even if credit card limits have a zero balance, some lenders will add the total that could potentially be owed and will treat it as a debt. Buy now pay later (BNPL) transactions can negatively impact borrowing power if payments have been missed in the past.
Planned lifestyle changes
The ability to repay a mortgage will be influenced by lifestyle changes. This could include taking time off to start a family, starting a new business and the financial risk it may entail, or a plan to reduce working hours to part-time.
Factor in Other Home Loan Costs
There is a range of additional costs to consider:
Stamp duty
Stamp duty needs to be paid on top of the deposit. The amount varies from state to state, but as a general rule – the higher the value of the property, the higher stamp duty becomes. Use an online calculator to determine what the obligations are in your state.
Other fees associated with a new mortgage
On top of stamp duty and the deposit are up-front fees, ongoing fees and exit fees. Up-front fees include conveyancing fees and legal fees. Make sure to factor these in to avoid stress around the time of purchase.
Rising interest rates
Higher interest rates affect more than just monthly repayments: they reduce borrowing power. In terms of repayments, much depends on whether the loan is variable or fixed (or a combination of both).
“If you’re on a variable loan and interest rates increase, then so too do your repayments. If your loan has a fixed interest rate, then interest rates don’t impact you until you come off the fixed rate period,” says Brand.
How to Know for Certain
Of course, this is a rough guide to help you get you started on the path to homeownership. Use our mortgage calculator to obtain more specific information and speak to a bank or a qualified mortgage broker.
Frequently Asked Questions (FAQs)
How much can I borrow when refinancing?
In general, during refinancing lenders will let a homeowner draw out no more than 80% of their home’s value, however this can vary among lenders so it is best to discuss this with a qualified broker or lender.
How much do I need to borrow for a mortgage?
A typical house deposit is 20% of the total price of the property, however some lenders will accept a deposit as low as 10% or 5%. Schemes such as the Family Home Guarantee provides for a deposit of just 2%, but eligibility requirements apply.
What is the average mortgage loan?
The average mortgage size for owner-occupier dwellings across Australia stood at $589,141 in August. That’s down from $609,043 in July. There is significant real estate price variations in different states and territories, as well as between capital cities and the regions—although this gap has narrowed considerably since the pandemic. The most expensive is New South Wales and the most affordable is the Northern Territory.
How much can I borrow on an 80k salary?
Much of the answer depends on how high your expenses are. If possible, look at ways to reduce lifestyle expenses before approaching a lender. A simple way of determining what you can afford as monthly repayments is this: 30% of an $80,000 salary is $24,000. Divide that number into 12 to work out the monthly repayment – the answer is $2000 in monthly repayments.
