How to Calculate My Borrowing Capacity for an Australian Mortgage
Unfortunately, lenders won’t let you borrow any old sum to buy a property. Each of us has a borrowing power – this is essentially the maximum home loan amount you can borrow from a lender. And it depends on several factors. Let’s look at what affects borrowing power and how to improve yours with our borrowing power calculator.
What Does Borrowing Capacity in Australia Mean?
Your borrowing capacity is the total amount of money you’re allowed to borrow from a lender. It’s influenced by your personal financial circumstances and affects which property you can buy. It’s best to calculate your borrowing power as soon as possible so you can begin to budget.
With an idea of how much money you can borrow, you’ll be able to narrow down your property search. Or, if you wish to purchase a property outside of your price range, you can spend a few months or a year improving your borrowing power.
Generally speaking, someone has a higher borrowing power if they have a strong credit history, cash deposit, and few other debts.
You can work out your borrowing power with our borrowing power calculator.
What Affects Borrowing Capacity?
Everyone’s borrowing power for a home loan is different. As an expat or foreign national, your borrowing power will vary from a permanent resident. Typically, borrowing power depends on your income, deposit size, living expenses, credit score, home loan type, interest rate, other assets, and property price. Let’s take a closer look at each of these.
The first question a lender will ask is how much money you earn. Your monthly income will affect how much you can afford in monthly repayments. To assess how much you can borrow and how much you can afford to repay, they’ll look closely at your gross income. This includes your salary and any payment you might have from an investment property.
The lender will also examine any other outstanding debts or commitments you might have, such as maxed out credit cards, personal loans, or a car loan. Lots of other financial obligations could negatively impact your borrowing power.
However, if you’re buying a property jointly, your combined income will be higher. Therefore, your repayment capacity is more significant, and your borrowing power is more substantial.
Get a free Australian mortgage assessment today.
A deposit proves your ability to save money over time. Also known as genuine savings, a sizable deposit suggests that you are at lower risk to the lender. Therefore, the lender will likely offer a more significant amount of money without upping the interest rates.
Generally, most lenders require a deposit of 20% of the property value. However, some lenders accept only 5%. However, as the loan to value ratio is very high, they also charge LMI – a hefty sum to protect the lender if the borrower defaults on their mortgage repayments.
Moreover, the greater your deposit, the more money you can borrow. Say you have a deposit of $50,000 – this would get you a home loan of $250,000 without incurring LMI. Comparatively, a deposit of $80,000 would result in borrowings of up to $400,000.
Beyond your income and deposit, the lender will also consider your living expenses. These include anything from school fees and childcare to rent. The lender typically divides costs into essential and voluntary. They deduct the former from your total income, affecting your borrowing power.
However, voluntary expenses (such as paying money into a pension) do not affect the amount you can borrow.
Once the lender offers you a quote, it’s sensible to determine your living expenses to ensure you can meet your monthly repayments without stretching your budget.
It’s worth noting that lenders apply Australian tax rates to foreign income, so your borrowing power may be lower than expected.
Your credit report is one of the most significant factors determining your borrowing capacity. Essentially, the report details your relationship with credit, your ability to repay debt, and any missed payments. A credit score is a number that reflects the state of your report.
If you have a strong credit score (700 and up), then this shows you are a reliable customer and will meet your financial obligations. However, a poor report will suggest you are at higher risk. Missed or late bills or credit card payments may have affected your score in the past.
Black marks on your score drop off after seven years. But, if it’s still on the report, it may affect your ability to secure a home loan. Some lenders specialise in bad credit loans – if you think this might apply to you, speak to a mortgage broker.
It’s also worth noting that applying for too many home loans within a short time will negatively affect your score. Therefore, ensure you only apply for finance that’s suitable for you.
Before speaking to a lender, get a copy of your credit score and report. It’s best to find out about any black marks or problems before the lender. You can get your report for free from one of the leading credit reporting agencies: Experian, Illion, or Equifax.
Get a free Australian mortgage assessment today.
Home Loan Type, Term and Interest Rate
How much you can borrow from the bank depends on the home loan type, term, and interest rate. Lower interest rates bring about lower monthly repayments. Similarly, a longer loan term also means lower repayments. On the other hand, the longer you pay your home loan, the more interest repayments and the higher the overall costs.
Australian expat home loans might have higher interest rates because of your foreign currency. Accordingly, you may not be able to borrow as much as an Australian citizen.
If you own any other assets, your application will look a lot better in the lender’s eyes. While they’re not strictly part of lending criteria, having a vehicle, investment property, or shares will influence their decision. This is because, like with your deposit, they show that you’re responsible with money and able to purchase other high-value assets.
Owning another property is one of the best ways to increase your borrowing power. Plus, you can use the equity on your investment property as a deposit for your new home loan.
Finally, the lender bases their loan amount on how much your desired property is worth. When you apply online for pre-approval, the lender will offer an estimate based on the above factors (income, credit score, expenses, etc.). However, once you have completed the house hunt and found a property you wish to buy, the lender will conduct a property valuation.
The valuation will determine the exact amount the lender will offer you. It’s worth remembering that just because you offered a certain amount to the seller, it doesn’t mean the lender will allow you a home loan of the same amount.
For example, if you offered the asking price of $600,000, but the lender’s property valuation estimated the property at $500,000, they will only lend you that amount. You would need to pay the shortfall. Therefore, it’s sensible to get a valuation done yourself before making an offer on a property.
Calculating Gross Income
Total income is one of the main criteria lenders will assess. Therefore, you should calculate your gross income yourself. The bank will consider several annual income sources, including:
- Base salary: this is the minimum amount you’ll earn from your employer for your services. It’s best to have at least three to six months of working with one employer behind you to prove your income is stable.
- Overtime: while not every bank accepts over time, some will include it in your total annual income calculation if it is regular. Some banks might only take 50% of your overtime income.
- Bonuses: again, this depends on the bank. If you have at least a two-year history of receiving bonuses, some banks might accept this income stream.
- Commission: as with overtime, banks accept commission if you can prove that it is steady and ongoing. You’ll need to show evidence of receiving commission for at least one or two years.
- Tax-free income: this is usually assessed on a case-by-case basis, but some banks accept certain types of tax-free income.
- Rental income: most lenders accept rental income from other investment properties. Although, banks typically use only 80% of the rental income to account for additional costs, such as management, maintenance, and repairs.
To find out your gross income, add all your income streams together.
Investment Property Loans vs. Owner-Occupier Home Loans
Investment loans and owner-occupier finance for residential property are quite different. In terms of borrowing power, most lenders are willing to offer higher amounts of money to investors. This is because an investment property has the prospect of rental income. The bank takes into account proposed rental income as well as current income.
Therefore, lenders can gamble that the investor is more likely to pay back more significant amounts. However, investment loans typically have higher interest rates.
Get a free Australian mortgage assessment today.
Can I Get a Mortgage as an Expat?
Yes, the home loan rules for an Aussie expat and Australian citizen aren’t too different. By and large, Australian expats are allowed the same loan terms as Australian citizens. However, a borrowing power calculator might show very different results for expats.
This is because banks don’t always take into account an expat’s total income. If you earn money in a foreign currency, the bank might not look at 100% of it. Depending on your currency, they could assess as little as 50%. The reduction is to account for fluctuating exchange rates. USD, GBP, and SGD are more reliable – lenders might consider 80% or more of your income.
Borrowing Capacity for Expats
With banks assessing less than 100% of your income, you might struggle to get the home loan you desire. Yet, be careful of using a joint borrower to increase your borrowing power. Foreign nationals must pay a stamp duty surcharge on Australian properties, reaching 7 or 8% of the purchase price.
It’s also worth noting that lenders with an Australian credit licence impose Australian income tax rates on your foreign income. Australian tax rates are one of the highest globally – this could further impact your borrowing power.
Speak to a specialist mortgage broker about home loans for expats and foreign nationals.
How Can a Mortgage Broker Help My Loan Approval?
Many banks aren’t willing to offer loans to expats or foreign nationals. They don’t have the resources or expertise to calculate different currencies and offer competitive pricing. Therefore, you could spend weeks searching for the right lender to suit your personal needs.
On the other hand, a mortgage broker will do all the hard work for you. With a panel of lenders on their side, they’ll point you in the right direction for your financial circumstances. Additionally, they will be able to explain how a different comparison rate is better for you.
Therefore, you can apply for your loan amounts knowing you have a good chance of getting your home loan approved.
How to Increase My Borrowing Capacity
Take these steps to improve your borrowing power for your home loan:
- Save up a higher deposit amount
- Improve your credit score
- Gather sufficient evidence for all your income streams
- Pay off other loan amounts
- Lower your living expenses
- Extend the loan term
- Shop around or speak to an expert mortgage broker
How Will I Afford My Loan Repayments?
Now you know your borrowing power and are eager to apply online for conditional approval. However, just because you’re able to borrow a particular home loan amount doesn’t mean it’s wise to borrow the entire loan amount. In fact, it’s a good idea not to borrow everything you’re offered. Remember that your home loan repayments include interest rates and other fees and charges.
If you stretch yourself too much, you risk not being able to afford other expenses – such as stamp duty and land tax.
Get a free Australian mortgage assessment today.
How to Compare Home Loans
Beyond looking at the interest repayments, you should compare other fees and charges that come with the home loan. For example, many lenders also charge loan application fees, annual fees, and additional costs.
Calculate your budget, borrowing power, and deposit size to determine what type of home loan is best for you. Think about variable or fixed interest rate loans, offset accounts, and other features.
Remember to consider how the loan term will impact the overall cost too. While a longer loan term has lower monthly payments, it has more interest repayments overall. Shorter loan terms might restrict your borrowing power but are less expensive.
Shortlist all the home loans you’re eligible for and rank them in order of comparison rate. While the interest rate is essential, the comparison rate shows the loan’s actual cost.
Your borrowing power isn’t the only factor of home loans. However, it is worth thinking about. If you have your eye on a specific property type, check whether the property price is within your budget.
Especially if you’re an expat or foreigner, Australian banks might not consider 100% of your income. Therefore, your borrowing power might not be as strong as you think. To improve your position, ensure you have enough evidence of your foreign earnings and speak to a mortgage broker about your situation.
Frequently Asked Questions
How Many Times My Salary Can I Borrow for a Mortgage Australia?
Your borrowing power depends on your income, deposit, and credit score. If your primary source of income is in a foreign currency, then the lender might only consider 50-100% of it. Accordingly, expats and foreign nationals borrowing power is often lower than that of Australian citizens, even if their salary is higher.
How Do You Calculate Borrowing Capacity?
Your borrowing capacity is calculated by adding your gross income, deposit size, and credit score. Your expenses and other debts count against you.
The lender wants to know how much you have surplus each month that could go towards a home loan. They follow this formula: gross income â€“ tax â€“ new and existing debts â€“ living expenses = monthly surplus.
How Much Can I Borrow With a $50,000 Deposit?
A $50,000 deposit will get you a home loan of around $250,000. However, the actual amount you can borrow depends on your credit score, total income, and other loan amounts. Use our borrowing power calculator to work out how much you can borrow.