How much can I borrow?
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How much can I borrow calculator
Whether you’re a first home buyer or a savvy investor, RateCity’s How much can I borrow calculator is an essential tool to work out one of the most pressing things house hunters need to decide early on in their search for real estate; their price bracket.
Once you’ve worked out how much you can realistically borrow – and comfortably afford to repay – then you can really start narrowing down your search for the perfect home and the perfect home loan to match.
RateCity’s How much can I borrow calculator will help you get the process rolling by providing a straightforward estimate of how much a financial institution could lend you, based on the personal information you provide.
How we’ve made our estimate
We’ve designed this calculator to give you an idea of how much lenders are likely to let you borrow. The calculator aims to simplify the banks’ notoriously complex serviceability criteria to help you work out what ballpark you should be aiming for when thinking about a home loan.
The estimate is based on the simple question of – what is the largest amount you could afford to repay each month after you pay for your living expenses and other debts. Importantly, the calculator is not reckless. It also adds a realistic buffer into the calculations because a home loan is a long term commitment, and things will change over time.
Of course, it goes without saying that RateCity’s How much should I borrow calculator provides a guide only. Each lender has their own methodology so there is never a one-size-fits-all answer to the question of how much you can borrow.
Any advice provided by our calculator is general in nature and has not taken into account your personal circumstances (see our full disclaimer). That’s why it’s important to talk to your preferred lender to check whether you meet their specific serviceability criteria.
Want to know more? A summary of each of the key factors that make up our calculator are outlined below, including an explanation of why they matter and what assumptions we’ve made to bring them all together.
Why each section matters (and the assumptions behind them)
Each lender has a slightly different way they work out how much they’ll lend to you. We’ve spoken to lenders and brokers, read industry papers, studied calculators made by lenders and loan documentation to identify the common ways lenders determine your borrowing profile.
This might be a brutally obvious question but whether there’s one or two people taking out a home loan can make the world of difference. On one hand, if there’s a second person and a second income, you may be able to borrow more, but on the other hand, if there’s two borrowers the lender will assume your expenses are higher (more on that soon). We also ask you how many kids you’ve got – not because we’re trying to conduct a quasi-census – but because kids cost money, so the more kids you have, the less you can borrow.
Loans and credit cards
If you want to borrow more, take the scissors to your collection of credit cards because most lenders will take a worst case scenario approach to your ability to max them out and only pay back the minimum. For example, if you have a $10,000 limit on your credit card, the lender will assume you have to pay back 3 per cent of that each month, so they add $300 to your monthly expenses. Drop that limit, and you’ll be able to borrow a little bit more for your future home.
Banks will also do the same with any personal loans you might have, such as a car loan, so if you can pay them down before you apply for a home loan, it could make a difference. If you’ve already got a home loan, and you’re looking to take out another one, most lenders will factor in a buffer on top of your current repayment – to prepare for higher rates in future. We’ve included this buffer in our calculations.
Living expenses are usually tough to estimate, but the reality is that they’re often the biggest expense in the book so it’s worth getting them right. Some people can recite their monthly or weekly expenses down to the cent but if you’re a little more care-free with knowing where your money goes this may take some time. Sit down with your monthly bills, your credit card and transaction account statements and work out exactly what your outgoings look like.
Don’t bother trying to pull the wool over the lender’s eyes – they’re not going to believe you if you low ball them with $200 in monthly expenses when you’re supporting three kids.The industry standard is to have a minimum monthly expenses based on whether you’re a single borrower, or a couple, and the number of dependents. This is inline with the Melbourne Institute’s quarterly report.
The current minimums are:
|Number of dependents
(Kids I support)
(It's just me)
(There's two of us)
It’s also really important not to fool yourself. Honesty is the best policy, both with your bank and yourself because the bottom line is that you’re going to have to come up with the mortgage repayments month after month for the next 20 or 30 years. Living in mortgage stress isn’t a whole lot of fun and the consequences can be extreme. If you think you’ll have trouble making ends meet, talk to a financial advisor or a financial counsellor, many of whom offer free services.
How do I get into mortgage stress?
How do you know if you’re suffering from mortgage stress? Well, mortgage stress occurs when a household has to devote at least 30 per cent of its pre-tax household income to paying off its mortgage.
Unfortunately, mortgage stress is a condition that affects many Australian households.
One driver of mortgage stress is when a household buys a property that is beyond its means. Another driver of mortgage stress is when a household suffers a big drop in income – perhaps because somebody loses their job. Mortgage stress can also be caused when a household is hit by increasing costs, such as rising interest rates or school fees.
Number crunching can go a long way to solving mortgage stress – or, ideally, preventing it from happening in the first place. You can use a borrowing calculator to figure out how your finances would be affected by different repayment scenarios. You can also use a budgeting app to take control of your spending.
Reducing spending often requires sacrifices – but if cutting back can get you out of mortgage stress, it will probably be worth it. Here are some ways you might be able to lower your costs:
- Exercise in the park instead of going to the gym
- Drink tap water instead of soft drink or alcohol
- Bring your lunch to work instead of buying it
- Eat at home instead of going to restaurants
- Replace the big overseas holiday with a local camping trip
If you were in a position to implement all five of these changes, you could conceivably save $10,000 per year, which would go a long way to getting you out of mortgage stress.
Mortgage borrowing amount
This is what we’ve all been working towards – how much is a lender likely to let you borrow. To calculate this, we’ve:
- Added up your total assessable income
- Worked out your total expenses, including loans & credit cards
- Set aside 15 per cent of your income as a buffer to cover any unforeseen circumstances
- Worked out how much you’ve got leftover. This is how much will go towards your monthly mortgage repayment
- Assumed your repayments will be based on a 30-year loan and an interest rate of 7.5 per cent (rates are at historical lows, but lenders play it safe and assume they won’t always be. This varies between lenders, 7 to 8 per cent is normal so we’ve split the difference)
- Determined the maximum borrowing capacity (loan size) based on a person whom contributes all of their leftover income towards monthly home loan repayments, i.e. the assessable income leftover after your total expenses, including loans, credit cards and 15 percent buffer are factored in
Remember; this is just an estimate and each lender looks at it slightly differently so your result will vary depending on who you speak to.
Other things to note
- All numbers are estimates; it is not a guarantee you’ll be able to borrow a particular amount and is not a pre-qualification for borrowing
- Lender’s serviceability assumptions can change at any time; this will impact how much you can borrow
- Interest rates can change at anytime, the calculator assumes a rate of 7.5 per cent, but you should factor in a higher percentage if you believe rates will be even higher in future
- The calculator measures loan serviceability, which is only one factor used by lenders when deciding whether to approve a loan. Your credit history, employment details and what property you are buying are some other factors
- This is for information purposes only, any advice is general and has not not taken into account your personal circumstances, read more here
Alex is a personal finance writer and PR professional at RateCity, and has been writing about finance for over three years. She is passionate about closing the gender pay and superannuation gap, and aims to help young Aussies to overcome their financial apathy and better manage their finances. Alex has been published in numerous print and online outlets, including Money Magazine, Lifehacker Australia, and Business Insider.