How Much Can I Borrow For My Home Loan?

“How much can I borrow from the bank?” – It’s the big question that everyone who’s looking to become a homeowner or grow their portfolio asks.

While there’s no guaranteed answer, there are a few factors that you should be aware of that can help you get an idea of the kind of response you’re likely to get. In this article, we’ll walk through some of the factors that may affect your borrowing power.

Your deposit can have a big impact on your borrowing capacity

Most Australians understand that they need a deposit to get a home loan, but few understand just how broad and significant an impact it has. Your deposit determines not just how much you need to borrow to actually purchase a property, but it can also affect your interest rate and the number and size of additional payments¹.

In a nutshell, the higher your deposit, the less you have to borrow. This relationship is referred to as your loan-to-value ratio (LVR) and it’s a number that lenders pay close attention to². An LVR over 80% – that is, should your deposit cover less than 20% of the cost of the home after additional fees – will mean you’ll usually have to pay lenders’ mortgage insurance³. This is commonly a one-off fee payable to the lender in order to protect them against the risk of you defaulting on the mortgage.

In some cases, exceeding the 80% threshold may mean you are bumped up to a higher interest rate, potentially costing you thousands more over the lifetime of the loan. Saving up more could actually result in you spending less over the course of the mortgage.

Understanding your credit score

Next is getting to grips with your credit score. Your credit score is a numerical representation of your ability to service a loan – in this case, a mortgage. It takes into account a lot of consumer behaviour, from how reliable you are in terms of paying bills, to whether you pay off your credit card every month. Your credit score and your credit history – the specific actions that affect your score – will be closely scrutinised by the lender prior to their making any decision about whether or not to lend to you.

Your credit score is monitored by a number of credit reporting agencies and is given as a number between 0 and either 1,000 or 1,200, depending on the agency⁴. On top of this, your individual score then corresponds to a rating on a five-point scale, from Excellent (highly unlikely to have your credit score negatively affected in the next 12 months) to Below Average (significantly more likely to have your credit score negatively affected in the next 12 months).

Where you sit on this scale can determine how much a lender is willing to lend to you, what the interest rate of the loan will be, and whether or not they’re happy to lend to you at all. Broadly, if your credit score is low, expect to have greater trouble getting a loan and to potentially pay more interest on that loan⁴.

What can you do to improve your credit score?

There are a number of simple steps you can take that may help to improve your credit score. Higher credit scores generally correspond with lower levels of debt, and more consolidated debt, so making loan repayments on time, consolidating loans or credit cards into a single product, and lowering credit card limits may reduce your risk in the eyes of lenders⁴. Additionally, paying your credit card off in full every month and paying utilities and rent on time can also have an impact on your credit score.

Your lender will look at your spending

In the past few years, lenders have progressively tightened lending criteria to protect themselves against mortgage default. This has led to many lenders taking an increased interest in the personal spending habits of applicants⁵. The bottom line is that lenders want the greatest certainty that you can service (or pay back) a mortgage. Because of this, they may see other personal expenses such as regularly purchasing take out food, gambling, or expensive subscription services as unnecessary and a potential roadblock to your ability to make payments.

You may be advised by a financial planner to tighten your belt in the months ahead of making a mortgage application, cutting back on recreational and or luxury expenses to prove that you can service a loan⁶.

Use our Borrowing Power calculator to see how much you may be able to borrow

Need a better idea of how much you can borrow? Use our borrowing power calculator to get a better idea of your current loan capacity. Please note that this tool may not reflect other factors in your life outside of the scope of the calculator, and professional advice should always be sought before making a financial decision.

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Sources:
1. https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/switching-home-loans/
2. https://www.moneysmart.gov.au/glossary/l/loan-to-value-ratio-lvr/
3. https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/fees#insurance/
4. https://www.moneysmart.gov.au/borrowing-and-credit/borrowing-basics/credit-scores/
5. https://www.smh.com.au/business/banking-and-finance/checking-on-lunch-kebabs-has-the-home-loan-crackdown-gone-too-far-20181213-p50lzw.html/
6. https://www.abc.net.au/news/2019-04-13/home-loan-application-how-to-why-is-it-so-complicated/10931734/