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  • How much can you borrow for a home loan?

    One of the first questions asked by most people when taking out a home loan is: ‘How much can I borrow?’ This brief guide suggests things you should consider as well as help determine your borrowing capacity.

    Getting different answers from different home loan providers?

    In Australia, home loan providers use many factors to work out what you can afford to borrow. Each has their own policies, resulting in different answers at times. 

    However, there are some key criteria common to all home loan providers that you need to consider in your assessment.

    Income

    This is key as to how much you can borrow. Your home loan provider will look at your income but also its type and regularity. Part-time earnings or overtime will be viewed more favourably if earned consistently over an extended period.

    Expenses and debts

    When reviewing your ability to repay a loan, home loan providers want to know that you can also meet your other commitments, including credit cards and personal loans. It may be wise to minimise or reduce your other loans and expenses before seeking home finance. 

    Also consider asking how your maximum borrowing limit may change if you consolidate any debts with your home loan. The lower your other loans and expenses, the more income you can allocate to home loan repayments - increasing the amount you can borrow.

    What type of borrower are you?

    To gauge what you can afford to pay, home loan providers consider your current work type/arrangement and the number of borrowers,  and the number of dependants you have.

    Loan purpose

    The amount you can borrow changes according to the purpose of your loan. Property investors taking out a home loan in Australia can often borrow more than owner occupiers with similar criteria – this is because home loan providers calculate the benefits from potential rental income when doing the calculations. Some home loan providers may lend for business or any non-residential purpose using residential property as security. 

    Location and property type

    Property prices do fluctuate and lenders will often limit the amount they will lend in certain areas and property types. It’s wise to contact your home loan provider if you plan to buy in a location like the inner city or an outlying regional area — or are considering a property that is ‘non-standard’ in size or construction style.

    Interest rate and loan term

    The interest rate and loan period affect the amount you can borrow – the higher the interest rate or the shorter the loan period, the higher your repayments. 

    Your deposit amount

    This is also a key factor in determining the amount you can borrow as it is linked to the loan-to-valuation ratio (LVR). For home loans in Australia, a maximum 95% loan-to-valuation ratio is common. 

    For a loan set at 95% of a property which is worth $200,000, you will need at least $10,000 plus funds to cover transaction and other costs. For a property worth $350,000, the minimum deposit rises to $17,500.

    The golden rule

    The first step is to get in touch with your home loan provider and obtain an assessment on your affordability and maximum loan to value ratio. This will help if need to figure out how much to save, for your new home.