What affects your borrowing power?

When determining how much you’ll be allowed to borrow, your bank or lender will take into account a number of factors. These include:

• Your income.
• The loan term

• Your employment stability

• Your expenses

• Whether you're a single applicant or couple. If there are two of you, each earning $50,000 and year, that put your combined income at $100,000, which may give you more borrowing power.

How much can I borrow?

The above calculator will give you an estimate of your borrowing power based on your current income and living expenses.

Let’s say that you’re earning $50,000 a year and currently spend $38,000 a year, with $14,000 of that going towards paying rent. Since you won’t have to worry about rent when you’re living in your newly purchased home, we can remove that from the equation. That puts your yearly expenses at $24,000.

Assuming an interest rate of 3.50% and a loan term of 25 years, you’ll be able to borrow somewhere in the ballpark of $236,842. 

By changing factors like your expenses or the loan you’re taking out, you might be able to increase your borrowing power. For example, by opting for a 30 year mortgage term instead of 25 years, you could borrow $256,154. Or, if you’re able to shave off $5,000 from your annual expenses, your borrowing power bumps up to $304,693. 

You can use the calculator above to work out how much you could potentially borrow in your situation. 

I want to borrow more. What are my options?

Unfortunately, if your income is $50,000 and you aren’t expecting a substantial pay increase in the immediate future, you may be limited in terms of how much banks will let you borrow. That said, there are still avenues available to you if your dream home falls outside your means.

• Ask family for help

If your parents or other family members have property of their own, they can act as your guarantors when taking out a loan. That means the equity in their house will be used as security for a portion of your home loan, essentially reducing the risk you pose as a borrower and allowing you to borrow more.

• Apply with a partner

In the eyes of a bank, two incomes are better than one, because it lowers the risk of a serious illness or an unexpected job loss wiping out your ability to make repayments. So whether you’re a couple or a group of friends that have decided to pool their finances, you’ll find you’re in a much stronger position to borrow than if you went it alone.

• Change your expectations

If a joint application or guarantor home loan aren’t options, it might be wise to reevaluate your goals a little bit, and perhaps look outside your preferred areas (or even cities) for something that fits your budget. Sometimes it pays to think of the first property you own as a stepping stone into the market, so you can snap up the property of your dreams down the track.

How do I get approved for a home loan?

Income is just one factor in being approved for a mortgage. With the level of scrutiny that’s being applied to homebuyers’ finances nowadays, you’ll have to go to show you’re ready for a loan. 

• You’ll need to prove you can budget effectively and rein in any unnecessary expenses

• You should minimise your other debts

• You should focus on paying off your credit cards on time

• You’ll need to show a track record of genuine savings

On top of that, lenders will also be paying close attention to your credit score. If you’ve been nothing but responsible with lines of credit (that is, you make all your repayments in full and on time), you should be able to get in their good books. If not, you might want to hunker down and work on getting your credit score in top shape.

How much deposit should I have?

Ideally, you should have at least 20% of a property’s value saved up for a deposit, because that means you won’t need to pay Lenders Mortgage Insurance (LMI). That means if you have your sights set on a $500,000 apartment, you’ll need to have at least $100,000 saved. This might seem like a tall order, but lenders prefer to deal with borrowers who have proof of genuine savings, as that signals they’re less likely to default on the loan.

If a deposit of 20% is currently out of your reach, you’ll be glad to know there are loans out there with Loan-to-Value Ratios (LVRs) of up to 95%, meaning you could potentially put down a deposit of $25,000 on a $500,000 home. Just keep in mind that if you opt for one of these low deposit home loans, you’ll need to factor the cost of LMI into your budgeting.

How much interest will I pay? 

The amount of interest you’ll pay will depend on a few things, namely the size of the loan, the length of the loan term, and of course the interest rate. Let’s assume you’ve been approved to take out a loan of $250,000. You’re also looking at an interest rate of 3.50% p.a. and intend to pay it off over a period of 25 years. In this scenario, your total interest paid will be $125,468. 

If, however, you do a little extra work and find a home loan that offers a more attractive rate, you stand to pay a lot less. For example, if you opt for a home loan with an interest rate of 3.00% p.a. you'll pay $105,658 in interest over the life of the loan - a difference of almost $20,000. 

That’s why it’s a good idea to shop around before you borrow: even a small difference in the interest rate can save you tens of thousands of dollars in the long-term. For an idea of what low interest rates currently looks like, be sure to visit our home loan comparison page.

What will my monthly repayments be?

Your repayments, like the amount of interest you pay and how much you can borrow in the first place, will depend on a number of factors. These include:

• the interest rate

• how much you borrow

• how long you’ll be paying it off for

• the frequency of the repayments

As an example, if you’re taking out a loan of $250,000 for 25 years and paying an interest rate of 3.50% p.a., your monthly repayments will be $1,252. 

If you’re able to commit to more frequent repayments - that is, by paying weekly or fortnightly - you’ll be able to save more in interest over the life of your mortgage. For example, let’s say you opt to pay your loan in fortnightly installments, in which case you’d be paying $577 per fortnight. Because you’re making more frequent repayments, over 25 years, you could pay more than $1,000 less than if you were paying monthly.

Where should I look for a mortgage?

Now that you’ve got a rough estimate of how much you’ll be able to borrow, the next step is to find a home loan that suits you. Our home loan comparison table will give you a selection of quality options, and you can filter your search to hone in on the kind of home loan you’re after.