One of the first questions people ask when thinking about buying a home is:
“How much can I borrow?”
It’s a fair question — but the answer is not always straightforward.
Your borrowing capacity depends on a number of factors, and it can vary quite significantly between lenders.
What affects your borrowing capacity?
Lenders look at a combination of things when assessing how much they’re prepared to lend:
Your income
How much you earn is a key factor, including salary, business income, and in some cases other sources of income.
Your existing debts
This includes things like credit cards, personal loans, car finance, and any other liabilities.
Your living expenses
Lenders will assess your day-to-day spending to understand what you can realistically afford to repay.
Your dependants
The number of people financially reliant on you (such as children) will also be taken into account.
Your savings and deposit amount
The size of your deposit not only affects how much you need to borrow, but also how lenders assess risk.
Where you live and the property type
Different locations and property types can influence how a lender views the loan.
How much can banks lend?
As a general guide:
- Many lenders are comfortable lending up to 80% of the property value (80% LVR) without requiring Lenders Mortgage Insurance (LMI)
- Some lenders may allow borrowing up to 90–95% LVR, although this often comes with additional costs such as LMI
(LVR stands for Loan to Value Ratio, which is simply the percentage of the property’s value that you are borrowing.)
What if you don’t have a 20% deposit?
There are situations where you may still be able to purchase a property with a smaller deposit.
For eligible first home buyers, government initiatives (such as the First Home Guarantee, previously known as the First Home Loan Deposit Scheme) may allow you to purchase with as little as 5% deposit, without paying LMI.
These schemes have specific eligibility criteria and limited places available, so it’s important to understand whether they apply to you.
The bigger picture
Borrowing capacity is only one part of the equation.
Just because a lender is prepared to lend a certain amount doesn’t necessarily mean it’s the right amount for you.
The more important question is: “What level of borrowing allows me to move forward comfortably, without putting unnecessary pressure on the rest of my life?”
If you’re considering buying a property and want to understand what your borrowing capacity might look like, it can help to talk it through before making any decisions.
If you’d like clarity around your position, we’re always happy to have a conversation.
NB: The content in this blog was accurate as at October 2020.