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Want to learn more about what impacts your borrowing power and how much you can borrow? Then read on
One of the first questions you’ll want answered when buying a home, is how much can I borrow from the bank? Your borrowing power is calculated on your ability to pay back your loan. Lenders will look at your income, living expenses and any debt you may have – as well as your credit score and whether you have any dependents. Then they can calculate an amount that is suitable for you to pay back.
While first home buyers are usually focused on how much they can borrow, it’s equally important to consider how much you should borrow – or how much you can comfortably afford to repay on a mortgage each month. Consider the added costs that come with buying a house, such as stamp duty, council and water rates – not to mention any maintenance and repairs that may need to be carried out – and then factor in a bit more to act as a buffer in the case of rate rises.
Your borrowing power (the amount you can borrow) is determined by a number of factors. lenders will look at your income (and whether you work full time, part time or casually), marital status, the number of dependents you may have, your credit score and expenses. You’re no doubt wondering about how much you can borrow on your current salary – and whether being self-employed will impact your borrowing power.
The only to know is to run the numbers, use our home loan calculator (Plans) if you're ready to do this
Just another name for Borrowing Power that lenders use.
If you are self-employed, some lenders will see you as higher risk. This is because it’s hard to put a fixed amount on your income. The same applies for casual or contract workers, who lack the security that a full-time job allows. Many lenders will also want you to have passed probation, or worked for a company for a certain amount of time, before they enable you to borrow.
While the rent you pay is not taken into account when looking at your cost of living if you’re going to live in the new purchase, other expenses such as bills, grocery costs, electricity and your phone plan are. Your borrowing power is dependent on your income, minus your expenses. The number of dependents you have will also affect how much you can borrow as dependents come with their own set of expenses (clothing, school costs etc). Every dependent you add on is going to reduce your borrowing power.
Let’s look at an example. For a couple with a combined income of $200,000, with a $50,000 credit card limit, living expenses of around $2,400 a month and no dependents, their borrowing power could be anywhere from $1 million to $1.25 million. But if they have one child before they decide to buy, their borrowing power will likely drop to between $939,000 and $1.16 million. If they have two children, it drops even further to between $875,000 and $1 million; and four children will see their borrowing power decrease to somewhere between $745,000 to $927,000.
It’s also worth noting that bank hopping – bouncing from bank to bank until you’re approved – can hurt your credit history. It’s a good idea to check your credit score on Get Credit Score, which will bring up the history of your credit applications, missed credit card payments, mortgages you’ve applied for, and any disputes you’ve had with a bank or lender. Our team of qualified experts can shortlist lenders that are friendlier to your circumstances.
Most lenders work out your borrowing capacity on a standard 30-year loan term. However, if you’re 70 years of age, there’s a fair chance that you won’t be around in 30 years’ time to finish paying off your 30-year loan. While applying for a home loan later in life is acceptable (divorce or death of a partner, downsizing/upsizing often play a role), the older you are the harder it will be to get approval for a loan.
Even if you’re 45-50 years of age and you can’t show how you will be able to repay a 30-year loan, there is a good chance your application will be knocked back unless you can provide an exit strategy.
An exit strategy is needed when the loan term exceeds the time and age of the borrower and is usually required for borrowers over the age of 50. An example of an exit strategy is having a large amount of superannuation or savings in the bank – or owning other properties that you could potentially sell to pay off the loan.
The state, city and suburb you live in will affect the amount you can borrow. Buying in an area with a flood of apartments and not a lot of population growth will be riskier (in the eyes of the lender) than buying in a high-density city where the population is growing at a rapid rate. For instance, the postcodes below are recognised by lenders mortgage insurance providers as areas in which borrowing restrictions may apply.
Your lender will want to know about any debt or potential debt you have, in the form of credit cards, personal loans or car loans. The more debt you have to pay off, the greater risk you pose as a customer. Even if you don’t owe anything on your credit card, a percentage of your limits will be considered debt.
There is no magic number when it comes to a deposit, however in Australia the majority of lenders require you to have saved 10% of the property’s value (a couple of lenders may only require 5%). This means if you’re looking to buy a house with a value of $800,000, you’ll need a deposit somewhere between $40,000 and $80,000.
If you only have a 5% deposit, be aware that this needs to comprise “genuine” savings – i.e. it’s not dependent on your brother selling his car, or a loan from a friend. These are the things that make lenders nervous. Your deposit will affect how much you are able to borrow from your lender. Please keep in mind that money from a parent or third party is known as a gift and not considered genuine savings.
A rule of thumb is, the smaller your deposit, the more rigid the regulations are on it. If you’ve only got a 5% deposit it has to be genuine savings. if you’ve got 10% or more, a gift (from a parent, for example) can be part of it.
When it comes to buying an investment property, lenders tend to be more rigid, with most requiring a deposit that is worth 10% of the property’s value.
UNO will help you identify the best deal for your circumstances from a large panel of lenders, so you don’t pay any more than you should to borrow funds for an investment property. We help property investors by ensuring your loans are structured in the best way for you and will even liaise with your financial adviser if requested.
The size of the deposit you can contribute compared to the value of the house you want to buy will dictate your loan to value ratio (LVR). LVR is a percentage calculated by dividing the amount of the loan by the purchase price or appraised value of the mortgaged property and is usually a key indicator of risk to a lender when considering a lending scenario.
The higher your LVR, the riskier the loan is for a lender and the higher the interest rate. Let’s look at a couple of examples:
If you have a deposit of $100,000 and you wish to buy an $800,000 house, you’re going to need to borrow $700,000. That means your LVR is 700,000 / 800,000 x 100, or 87.5%. This is quite a high LVR, which shows that you represent some risk to the lender in terms of making (and meeting) repayments.
If you have a deposit of $125,000 and you wish to buy a $500,000 property, you’ll need to borrow $375,000. In this scenario, your LVR is 375,000 / 500,000 x 100, or 75%. This LVR presents less risk to the lender.
When it comes to your borrowing power, your LVR should be typically no higher than 60% for low documentation (low doc) loans, no higher than 80% for borrowers who want to avoid Lender’s Mortgage Insurance (LMI), and no higher than 95% if you are borrowing from a mainstream lender.
Our advisers can assist you in sourcing the most suitable product based on your LVR and income, whether that be lowest cost or highest borrowing power.
UNO is accredited with lenders covering 94% of the Australian market, which helps us offer the best solutions for your unique personal circumstances.
Once your lender approves your loan, you have 90 days to buy a property before that pre-approval expires. If you fail to purchase a home within that time frame, you will need to renew the pre-approval with the lender. This will most likely involve sending some recent pay slips. If you’ve changed jobs or purchased a new car, this may affect your borrowing power.
Those seeking a home loan can push hard for a bargain by ensuring they have a good credit rating. The key is to pay off credit cards on time and have no other outstanding financial obligations that may raise a flag with a lender. You can be sure prospective lenders will be checking your credit rating, so make sure you are too. If you’re in good financial health, and you can prove it, you’ll be in a much stronger negotiating position.
Even the slightest rise in income can yield a tremendous increase in borrowing power. In fact, as little as $10,000 delivers up to $50,000 in newfound borrowing power. Getting a pay rise is one way to boost your borrowing capability.
Slicing up your credit cards is a great way to eliminate debt and maximise your borrowing power. With credit cards, lenders don’t just look at your spending patterns – they assess you based on your credit limit. So if you only spend $1,000 per month on your card, but have a limit of $10,000, lenders assess you on the full $10,000.
Plug your numbers into a borrowing power calculator (at the top of this page) to get an estimate of your loan size range. Once you have that home loan, UNO can offer advice on how to maximise your repayments. Our qualified staff can also offer advice on knowing when to refinance and how to set up an offset account.
Now that you know what your deposit can get you, it’s time to find a lender. There’s actually a surprisingly large difference between the amount different lenders will lend to the same customer. Type your details into UNO’s home loan calculator and our technology will filter thousands of home loan combinations to reveal the best deals for you, and show you which lenders are more likely to offer the loan size that you’re looking for.
The amount you can borrow can differ by lender. It is dependent on a range of factors. A UNO mortgage broker knows what each lender is looking for and will work with you to find the best lender for your borrowing capacity. We talk to lenders daily and will use our knowledge to present the right loan options for you.
Plus, when you search for home loan rates online with UNO, our technology actually shows you which lenders are more likely to consider lending you the loan size you are looking for. You can get started in searching for home loans and comparing lender borrowing power here.
UNO works with major lenders CBA, National Australia Bank (NAB), St George Bank, Westpac and ANZ. We also work with a bunch of smaller lenders, including Adelaide Bank, AMP Bank, Bank of South Australia, Bankwest, Macquarie Bank, ING Direct, Me Bank, Pepper home loans, and Suncorp.
A UNO expert can help you find out if you’ll need Lenders Mortgage Insurance and calculate what your LMI is likely to be. LMI is a fee charged by finance lenders to home buyers who have a deposit that is less than 20% of the property’s purchase price. It can vary significantly between lenders but is calculated based on two main risk variables: the loan amount; and the loan to value ratio (LVR). You can also see the cost of Lenders Mortgage Insurance for your situation by starting the search process with UNO here.
Stamp duty is a percentage of the purchase price paid to the state government to cover the cost of the property ownership transfer. Payable in every Australian state and territory, the cost will vary depending on where you live and your circumstances (whether you’re a first home buyer, investor or owner-occupier). Stamp duty on a $1 million existing home for an owner-occupier in NSW, for example, is currently $40,768. Remember to factor in stamp duty when you’re working out how much money you have for a deposit as you cannot borrow stamp duty.
If you already own a home or an investment property, you may qualify for a home equity loan, whereby you use the equity you have built up on another property to secure a new home loan. With enough equity, you won’t have to pay a cent towards a deposit. You can even find out how much equity you can borrow against with an online calculator.
Most home loan calculators use a few simple variables to estimate either a range, or a maximum amount, that you may be able to borrow. Some simply take into account whether the application is joint or single, and your monthly income and expenses. Others are more precise and include factors like marital status, the number of dependents, the repayment type (that is, whether your home loan repayments will include principal, or be interest only), and your credit card limit.
Because different lenders will lend different amounts to the same customer, the figure you’ll get from a mortgage calculator on one Australian website might be hundreds of thousands of dollars different from what you find on another website. This is why you shouldn’t take a home loan calculator result as gospel – you’ll need to go through the process of pre-approval before you can be confident about how much you can borrow.
At UNO, we try to give you more confidence about your borrowing power upfront by pulling in the credit policies of all of our lenders (big, medium and small lenders from around Australia) and combine them into the one calculator that gives you a range of borrowing power. This gives you a broader view than using a calculator from a single lender.
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