Mortgages

How much can I borrow to buy a home?

Nathan Gooley
May 21, 2021
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

When starting your home buying journey, one of the most critical questions you need to ask and answer is “how much can I borrow?” You can then work out the budget for your property search and the money you need to save for a deposit and other upfront costs.  

How much do I need to save for a deposit?

One of the key parts of working out how much you can borrow for a home loan is knowing your deposit amount. If you’re a first home buyer, you may be able to use the first home owner grant to help cover part of the deposit. But the more deposit you can save yourself, the higher the loan amount you’ll likely be able to obtain.

When researching home loans, you’ll come across the term loan-to-value ratio or LVR. LVR is the percentage of the property’s price you intend to borrow. The higher the LVR, the lower the deposit amount, but this lower deposit may come with the additional cost of Lenders mortgage insurance (LMI)

What other upfront costs do I need to consider?

Other upfront costs come with purchasing a property besides the deposit. You’ll need to consider them all when looking at the budget you set for your property search and when determining how much you can or need to borrow. 

Here are the most common upfront costs you’ll pay on top of the deposit:

  • Stamp duty - A tax paid to the state or territory government for the property purchase. Some states offer stamp duty waivers for first home buyers.
  • Home loan application fees - Once you find a lender, they may charge a fee for processing your home loan application. At Yard, we don’t charge application fees on our home loans.
  • Lenders mortgage insurance (LMI) - If you’re unable to save at least a 20% deposit, you’ll be charged this by your lender. The cost of LMI can run into tens of thousands dollars.
  • Pre-purchase inspections - Before you purchase a property, you’ll want to do due diligence, including having the property inspected by qualified building and pest inspectors. If you’re buying a property with strata or an owners corporation, you’ll also want to get a strata report to check for any issues. They usually only cost a few hundred dollars each.
  • Legal or conveyancer fees - You’ll need to have a solicitor or conveyancer review the contract and help with the sale process. Most solicitors will send a single bill once you’ve successfully made a purchase, even if they’ve reviewed multiple contracts.
  • Home and contents insurance - It’s wise to have the property covered by insurance before settlement ends and you become the official owner.
  • Moving costs - These may seem insignificant, but they shouldn’t be ignored and depending on how big the move is could cost more than you think.

Is there a difference in deposit needed if I’m an investor vs an owner-occupier?

Lenders will separate their home loans between owner-occupied and investor with different interest rates and terms on each loan type. Part of this will often be that lenders will ask investors to have a higher deposit. 

For example, an owner-occupier will be able to access a loan with an LVR of 95%, subject to LMI, meaning you only need to save a 5% deposit. However, an investor mortgage may be capped at 90% LVR, subject to LMI, meaning a 10% deposit is needed. Whatever your circumstances, the more you can save for the deposit, the better off you’ll be.

How do I work out how much can I borrow for a home loan?

Working out how much you can borrow for your home loan involves looking at all the factors that a lender will consider when determining your mortgage borrowing capacity. The basic formula for working out how much you can borrow for a home loan is to subtract your monthly expenses from your total monthly income. However, when lenders assess your borrowing capacity, that’s not all they’ll consider. They take a much broader look at your financial situation.

Lenders will look at the below factors when determining how much you can borrow:

  • Income - The first thing lenders will look at when determining your borrowing capacity is, of course, the combined total income of all borrowers named on the application. Your income will include not just what you get paid for your day job but also any investment income, including other properties or shares.
  • Employment status - Lenders will also want to know that the income you’re receiving will continue and therefore be able to service the mortgage repayments. If you work for yourself, part-time or casually, a lender may ask for more information to feel confident your income is consistent and ongoing.
  • Expenses - A huge part of working out how much you can borrow is how much you spend each month. You can help yourself by reducing your expenses as much as possible before applying for a home loan. 
  • Liabilities - When assessing your borrowing capacity, lenders will include all your current debts. This will consist of personal loans, car loans, HECS or HELP debts and credit cards, which lenders will assess based on the credit limit, not your current balance. They want to see if adding the new mortgage repayments to your current debt repayments would put you under financial stress. Paying down as much debt as possible and reducing the limits of credit cards or getting rid of them will increase the amount you’ll likely be able to borrow. 
  • Credit score and history - Every lender you apply with will do a credit check. Lenders use your credit score and credit history to judge your ability to repay financial obligations. The higher your credit score, the higher the likelihood of getting your loan approved.
  • Loan term - Standard home loans are 25-30 years, and lenders use this term when calculating how much you can borrow. If you want a shorter loan term, it comes with higher repayments which could mean you’ll get a smaller loan upfront.
  • Location of the property - There may be some LVR restrictions in specific locations because they have less possibility of property values increasing. For instance, high-density areas may be slow to increase in value because of the high number of properties. Rural areas may do the same but due to lower buyer interest. 

How much should you borrow for a home loan?

Just because you can borrow $1 million, let’s say, doesn’t mean you should borrow that amount if it means you’ll end up under financial stress. You need to consider how much you can comfortably repay over the next 30 years and continue to repay if circumstances or interest rates change. 

It’s often wise to budget for interest rates to increase at least 2-3% to give yourself a buffer just in case. This buffer will help protect you from interest rate changes and changes to your personal circumstances like a change in your job, which means less income.

You also have to remember that there are costs like council rates, water charges, and the cost of maintenance and repair of the property you’ll be responsible for as a homeowner. 

How can I use a mortgage calculator to help with my borrowing power?

To help you work out how much you can borrow, you can use a mortgage calculator. It will take in most of the information lenders use to calculate your borrowing capacity and offer a guide on how much you may be able to borrow. 

But any calculator you use, even if it’s on your chosen lenders website, should only be taken as a guide. Each lender has its own set of credit policies they apply to your specific circumstances. If you want a more accurate idea of how much you can borrow, you should speak to a lender’s home loan expert directly, and they can help advise.

What to do after I work out how much I can borrow for a home loan?

Once you have a guide on how much you can borrow, you now have a general idea of the budget you can use to search for properties. If you’d like more certainty in that budget, you should seek conditional or pre-approval for a home loan from a lender. A lender will do all the relevant calculations and then let you know how much they are willing to lend you. This approval will be on the condition that your circumstances don’t drastically change before you apply for final approval and only valid for a set period, generally 90 days. 

If you cannot apply for final approval before your conditional approval expires, meaning you haven’t found a property, you can often reapply. Get started on your home buying journey today by finding out how much you can borrow or speaking to one of our experts about conditional approval.

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