How much can I borrow based on my home loan deposit?

Thinking about buying your first home? Or maybe an investment property? No matter what type of buyer you are, finding out your borrowing power should be among the first things you do.

In this guide, we’ll explore how banks calculate your borrowing power, what to do if yours falls short of your expectations, and some additional costs you’ll need to consider when taking out a home loan.

Calculating how much you can borrow

When determining your borrowing power, lenders will weigh your income and assets against your expenses and debts. The difference helps them determine how much you can comfortably afford to repay.

A home loan borrowing calculator can give you an idea of how much you might be able to borrow based on your current circumstances. Just keep in mind that the figure provided is a rough estimate, not a guarantee. You can also use a home loan deposit calculator to work out the potential upfront costs you will be paying on purchasing a home.

For example, Yvonne and Josh both earn \$70,000 a year, giving them a combined income of \$140,000. They have no dependents and their living expenses come to \$4,000 per month.

Taking those figures into account, and assuming the loan that they take out will be paid off over 25 years and that the interest rate they’ll get is 3.5% p.a., the couple could afford to borrow around \$1.4 million.

﻿Work out your loan to value ratio (LVR)

In Australia, banks prefer to lend to borrowers with a loan to value ratio (LVR) of less than 80%. That means you should aim to have at least 20% of the property’s value saved up for a deposit.

This shows the lender you’re able to save and reduces your risk profile in their eyes. Borrowers who can’t meet the 80% LVR threshold will typically be required to purchase lenders mortgage insurance (LMI), which can cost thousands of dollars.

For example, Yvonne and Josh have saved up a deposit of \$100,000 and are looking to purchase a property worth \$500,000. As their deposit comes to 20% of the property’s value, their LVR will be 80%. That means they won’t have to purchase lenders mortgage insurance.

Work out your home loan repayments

It’s one thing to ask “how much can I borrow?” but another thing to actually repay the loan. There's no hard and fast rule about how large a debt burden you should take on, but one theory suggests that your home loan repayments shouldn't exceed 35% of your gross income.

Use a mortgage repayments calculator to see how much your ongoing repayments will be, and decide whether you can realistically afford the amount coming out of your account each month.

But what about a rate rise? Our rate change calculator can show you how much extra you’d be paying under rate hikes of different sizes.

Stamp duty

When buying a home, you’ll also have to consider the cost of stamp duty. This is a tax charged by state and territory governments, and depending on the price of the property and the type of buyer you are, it can easily reach into the tens of thousands of dollars.

To find out how much stamp duty you may be liable for, use our stamp duty calculator. It will break down the costs of stamp duty depending on the state or territory you’re looking to buy in, including any exceptions you may qualify for.

Once you have an idea of how much you can afford to borrow, don’t forget to factor in all the extra costs of purchasing a property into your budget:

• Mortgage establishment fees: When you apply for a home loan, you may be charged a number of upfront fees that can cost anywhere between \$0 and \$1,500.
• Ongoing home loan fees: You may also be charged a yearly fee by the provider servicing your loan, however, this generally doesn’t go higher than \$400. Often providers will waive this fee altogether for refinancers.﻿
• Conveyancer fees: To get your conveyancer or solicitor to look over the contract, you will be charged a fee of around \$2,000.
• Pest and building inspection fees: Don’t want a house with termites? Don’t forget to get pest and building inspection done that will alert you of any critters, as well as any structural problems with the property.
• Lenders mortgage insurance: If your deposit is less than 20% you may be charged lenders mortgage insurance. This isn’t a protection for you but instead protects the lender in case you default on your loan. Luckily for those eager to get into the market, LMI can be added to your home loan amount.﻿
• Income protection insurance: While you may be able to comfortably afford your repayments, income protection insurance can help you cover the repayment costs while you are unable to work.
• Home and contents insurance: Also make sure you protect the items in your home, as well as the property itself with home and contents insurance.
• Landlords insurance: If you’re purchasing an investment property and plan to have tenants, landlord insurance will give you the peace of mind against any mishaps that may occur, like damage to your property or rental loss.

How can I increase my borrowing power?

It pays to reflect on your finances before you apply so you can put yourself in the strongest position possible. Here are some tips to help increase your borrowing power:

• Trim your expenses: When assessing your ability to service a loan, lenders will take a magnifying glass to your finances to see where your money is going each month. Before you apply it may be worth tightening your belt and reviewing any unnecessary spending.
• Pay off debt: Getting on top of your debt and paying off any owing balances will help you get in a lender’s good books.
• Get a copy of your credit report: Before you apply for a mortgage make sure all the details on your credit report are correct, as any mistakes could hinder your chances of being approved for a loan.
• Get saving: Lenders will be looking for evidence of genuine savings, so make sure you’re setting aside a sufficient amount of money each month.

Borrowing power FAQs

What if I don't have a 20% deposit?

If you don’t have a 20% deposit, don’t fret. A number of lenders provide low deposit home loans with LVRs as high as 95%.

The First Home Loan Deposit Scheme (FHLDS) also lets eligible first-time borrowers take out a home loan with a deposit of 5% while the Federal Government acts as a guarantor for that 15% gap.

What if the bank rejects my application?

If your home loan application was rejected outright, it means that your lender isn’t confident in your ability to service a mortgage. Before you re-apply, you’ll need to examine your finances and make some large changes.

Try to improve your credit score by keeping credit card balances low, only applying for credit when you really need it, and ensuring all your bills are paid on time.

Keeping track of your expenses can also give you a clearer idea of where your money is going each month. This can help you identify any unnecessary expenses and make the changes needed to bolster your finances.

When you’re ready to kick off your home loan application, make sure you visit our home loan comparison page to see the latest rates and find a loan that might work for you.

Tom Watson
Finance journalist

Tom has over five years experience as a finance journalist covering everything from property and fintech to consumer banking.

Niko Iliakis
Money writer

Niko has three years experience as a finance journalist. He specialises in home loans, business loans and interest rate movements at Mozo.

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for \$150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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