Working out how much to borrow when buying property

Whether you’re in the market for your first home, next home, or an investment property, you’d probably like to know how much you could borrow. Once you have a ball-park figure, you can look for homes in your price range with more confidence.

In the world of home loans, we call this your ‘borrowing power’.  Once you’ve figured out your borrowing power, you’ll have an approximate idea of your price range when you start house hunting.

So how do home loan lenders work out your borrowing power? Generally, your borrowing power is based on your 'net income', minus 'expenses'.

• Your 'net income' is your after-tax income.
• Your ‘expenses’ are daily living costs, bills, plus any other debts you’re currently paying off (such as credit cards, car loans, or personal loans). 

It sounds like a simple formula, but it can get complex because lenders need to consider things like the size of your family, or even the credit cards you may not be using. 

The lending formula

Every lender’s formula for calculating borrowing power may be slightly different. Usually, they’ll take the following into consideration:

• your income, which can include bonuses, commissions and overtime
• the number of dependants in your family
• the secured and unsecured debts you hold (e.g. credit cards, personal loans or car loans)
• your living expenses.

Lenders tend to take a prudent approach to their calculations. For example, when it comes to credit cards, they may take into account the limits on your cards - even if you don’t currently owe anything on them. So if you’ve got a credit card with a $20,000 limit, they may see that $20,000 as potential debt and then count the potential credit card repayments as an expense.

The lender also takes a similar approach when assessing your ability to make repayments. They'll factor in future interest rate rises and assess your ability to cope with the higher repayments that may be required.

Given all of this, it’s likely that different lenders will quote you a different maximum borrowing power. This is also why you may find that different online calculators can give you different results.

Get a borrowing estimate

Looking beyond the formula 

As an example, let's say you're looking to buy a property and need a home loan of around $500,000 to purchase the property. If the lender approves this amount, you still need to ask yourself if you could comfortably afford the monthly home loan repayments (as a rough estimate, assume about $2,550 based on an example interest rate of 4.5% on a 30-year loan term with principal and interest repayments). 

Also consider how you would cope if interest rates were to increase (say to 6.5%. This would mean your repayments would increase by over $600 a month. 

Have a think about your situation when working out how much you could borrow. You should be realistic about what you can afford today and in the coming years. 

Estimate home loan repayments

To work out how much you should borrow (as opposed to how much you could borrow) it could be good to go back to the basics and do a budget check. Look at your current lifestyle, track your spending, and see how much money you have left over each month. This may help you decide how much you could afford to put towards home loan repayments. 

Understand my expenses

If you haven’t got kids yet – but they are on your radar – then this is something you need to consider. For example, in five years and two babies’ time when one of you may not be working – will you still be able to afford the home loan repayments?

Start talking 

While online calculators provide an indication of your borrowing power, they are an estimate only. 

It could be a good idea to make an appointment with a lender to run through your financial situation, so you could get a more definitive answer. Then, you’ll be able to start house hunting with confidence.

To sum up 

• Generally speaking, your borrowing power is based on your net income, minus your expenses.
• Expenses can be affected by things like the number of dependants you have, or the amount of secured and unsecured debts you have.
• Think carefully about how much you can comfortably pay off a home loan each month, now and in the future.