What’s your home loan borrowing power? How lenders calculate borrowing capacity

No two mortgages are the same, which is why comparing home loans is vital. Every home loan offer will have different fees, interest rates, features, and more. But not every lender calculates borrowing power and risk the same way, either, which means different lenders let you borrow different amounts of money. 

So how can you compare your borrowing power with different mortgage lenders? And could one lender let you borrow more? Let’s dive in.

Borrowing power is the amount of money a home loan lender is willing to give you. If your home loan application and serviceability tests show you can meet your financial obligations, the lender will likely approve you for the sum you need to buy a property. 

Every lender will estimate your borrowing capacity a little differently, but the main things they consider are your:

• Income
• Debts
• Spending habits
• Regular expenses
• Savings
• Share portfolio
• Family situation
• Credit history
• Deposit size.

Each of these factors creates a risk profile for you as a borrower. If you spend too much money or have too many competing debts, then you’re a risky borrower because there’s a greater chance you’ll struggle with mortgage repayments. 

However, if you save plenty of money, keep a clean credit history, and can demonstrate a reliable income, you look like a safer bet for a lender. As a result, they let you borrow more because the financial risk of not making back their money is lower. 

Home loan lenders calculate your borrowing power by looking at your income and expenses. Ideally, they don’t want you spending more than 30% of your monthly take-home pay on mortgage repayments, so they will see how much money comes in and how much goes out. 

They then compare the money left over with the estimated size of your mortgage repayments, as well as your loan term. Can you make repayments with plenty of cash to spare? Can you make repayments consistently for 20+ years? Once the lender has these numbers, they can establish the size of the home loan you afford, i.e. your borrowing power. 

Every home loan lender has different comfort levels when it comes to risk exposure. Some lenders will only lend to borrowers who have at least 80% LVR, while others may let you take out a loan with a smaller deposit. Some lenders may also have caps on the total sum they lend to customers, though this will depend on their funding. 

A lender will also stress test your ability to pay your mortgage at interest rates up to 3% higher than the one you’re applying for. Variable interest rates can change, and even fixed rate home loans roll onto variable rates once your fixed term has expired. They want to know you have financial wiggle room and can absorb rising costs. You may be able to afford a 5% interest rate, but if you’ll struggle with an 8% interest rate, they’ll reduce your borrowing capacity to avoid mortgage stress.

Most home loan lenders will have a borrowing calculator available on their website. This lets you estimate how much you could borrow with them without having to apply first. That way, you can get an idea of which lenders could offer you the best value for your mortgage. 

You could also talk to an expert from the lender to see how much you could borrow, or liaise through a mortgage broker to see how different lenders compare for your situation.

You can apply to more than one home loan lender, but it’s better to do it one at a time. Whenever you lodge a home loan application, it counts as a ‘hard enquiry’ on your credit report. If you make too many hard inquiries at once, it looks like you’re shopping around and sourcing too much credit, which makes lenders nervous. This could actually lower your credit score and make it harder to take out a home loan. 

Instead, research and compare home loan options carefully in advance and make a tier list of your preferred lenders. Apply to your first choice first, second choice second, and so forth as needed until you successfully qualify for the loan you want. 

However, too many rejected applications can also hurt your credit score, so if your second-choice lender doesn’t approve you for the home loan, speak to a financial planner and see what you can do. There might be unintended red flags in your home loan application, or maybe you’re applying for home loans you don’t have the borrowing power to service.

Compare home loans in the table below.