The key to home ownership: know your borrowing power
Calculate your borrowing power
What is my borrowing power? How a home loan borrowing calculator can help you.
Your borrowing power (the amount you can borrow) is determined by a number of factors. Lenders will look at your income (and whether you work full time, part time or casually), marital status, the number of dependents you may have, your credit score and expenses. You’re no doubt wondering about how much you can borrow on your current salary – and whether being self-employed will impact your borrowing power.
Let’s say you’re a single person earning $100,000 a year. You hold a credit card with a $10,000 limit, and your living expenses amount to around $2000 a month. uno’s home loan borrowing calculator will estimate your borrowing capacity somewhere between $470,000 and $580,000.
Now let’s say you’re a couple with one child, with a combined salary of $175,000 and living expenses of $2500 a month. You also have a credit card with a limit of $20,000. Your borrowing capacity now is somewhere between $880,000 and $1.1 million. Try the uno calculator or speak to one of our qualified brokers to find out more about your borrowing capacity.
Lenders uno works with
Adelaide Bank
AMP
ANZ
Bank of Melbourne
BankSA
Bank of Sydney
Bankwest
Bluestone
Citi Australia
Commonwealth Bank
CUA
Firefighters Mutual
Health Professionals Bank
ING DIRECT
La Trobe
Liberty
Macquarie
MAS
ME Bank
Mortgage House
National Australia Bank Group
Pepper
Qudos Bank
Resimac
St.George
Suncorp Group
Teachers Mutual Bank
UniBank
Westpac
HOME LOAN TERMS TO KNOW
Home loan serviceability
Another way of looking at how much you can borrow, is your ability to meet your loan repayments – known as serviceability. Lenders will generate a figure based on your monthly debt expenses as a proportion of your monthly income, which is known as the debt service ratio.
Our team of experts will be able to guide you through these questions and key terms, but in the meantime, here are some things to consider:
Type of employment
If you are self-employed, some lenders will see you as higher risk. This is because it’s hard to put a fixed amount on your income. The same applies for casual or contract workers, who lack the security that a full-time job allows. Many lenders will also want you to have passed probation, or worked for a company for a certain amount of time, before they enable you to borrow.
Cost of living and expenses
While the rent you pay is not taken into account when looking at your cost of living if you’re going to live in the new purchase, other expenses such as bills, grocery costs, electricity and your phone plan are. Your borrowing power is dependent on your income, minus your expenses. The number of dependents you have will also affect how much you can borrow as dependents come with their own set of expenses (clothing, school costs etc). Every dependent you add on is going to reduce your borrowing power.
Let’s look at an example. For a couple with a combined income of $200,000, with a $50,000 credit card limit, living expenses of around $2,400 a month and no dependents, their borrowing power could be anywhere from $1 million to $1.25 million. But if they have one child before they decide to buy, their borrowing power will likely drop to between $939,000 and $1.16 million. If they have two children, it drops even further to between $875,000 and $1 million; and four children will see their borrowing power decrease to somewhere between $745,000 to $927,000.
Credit score
It’s also worth noting that bank hopping – bouncing from bank to bank until you’re approved – can hurt your credit history. It’s a good idea to check your credit score on Get Credit Score, which will bring up the history of your credit applications, missed credit card payments, mortgages you’ve applied for, and any disputes you’ve had with a bank or lender. Our team of qualified experts can shortlist lenders that are friendlier to your circumstances.
Loan term
Most lenders work out your borrowing capacity on a standard 30-year loan term. However, if you’re 70 years of age, there’s a fair chance that you won’t be around in 30 years’ time to finish paying off your 30-year loan. While applying for a home loan later in life is acceptable (divorce or death of a partner, downsizing/upsizing often play a role), the older you are the harder it will be to get approval for a loan.
Even if you’re 45-50 years of age and you can’t show how you will be able to repay a 30-year loan, there is a good chance your application will be knocked back unless you can provide an exit strategy.
An exit strategy is needed when the loan term exceeds the time and age of the borrower and is usually required for borrowers over the age of 50. An example of an exit strategy is having a large amount of superannuation or savings in the bank – or owning other properties that you could potentially sell to pay off the loan.
Location
The state, city and suburb you live in will affect the amount you can borrow. Buying in an area with a flood of apartments and not a lot of population growth will be riskier (in the eyes of the lender) than buying in a high-density city where the population is growing at a rapid rate. For instance, the postcodes below are recognised by Lenders Mortgage Insurance providers as areas in which borrowing restrictions may apply.
Credit cards and personal loans
Your lender will want to know about any debt or potential debt you have, in the form of credit cards, personal loans or car loans. The more debt you have to pay off, the greater risk you pose as a customer. Even if you don’t owe anything on your credit card, a percentage of your limits will be considered debt.
How much deposit do I need to buy a house – as an owner/occupier?
There is no magic number when it comes to a deposit, however in Australia the majority of lenders require you to have saved 10% of the property’s value (a couple of lenders may only require 5%). This means if you’re looking to buy a house with a value of $800,000, you’ll need a deposit somewhere between $40,000 and $80,000.
If you only have a 5% deposit, be aware that this needs to comprise “genuine” savings – i.e. it’s not dependent on your brother selling his car, or a loan from a friend. These are the things that make lenders nervous. Your deposit will affect how much you are able to borrow from your lender. Please keep in mind that money from a parent or third party is known as a gift and not considered genuine savings.
A rule of thumb is, the smaller your deposit, the more rigid the regulations are on it. If you’ve only got a 5% deposit it has to be genuine savings. if you’ve got 10% or more, a gift (from a parent, for example) can be part of it.
How much deposit do I need to buy a house – as an investor?
When it comes to buying an investment property, lenders tend to be more rigid, with most requiring a deposit that is worth 10% of the property’s value.
uno will help you identify the best deal for your circumstances from a large panel of lenders, so you don’t pay any more than you should to borrow funds for an investment property. We help property investors by ensuring your loans are structured in the best way for you and will even liaise with your financial adviser if requested.
What is my loan to value ratio (LVR)?
The size of the deposit you can contribute compared to the value of the house you want to buy will dictate your loan to value ratio (LVR). LVR is a percentage calculated by dividing the amount of the loan by the purchase price or appraised value of the mortgaged property and is usually a key indicator of risk to a lender when considering a lending scenario.
The higher your LVR, the riskier the loan is for a lender and the higher the interest rate. Let’s look at a couple of examples:
If you have a deposit of $100,000 and you wish to buy an $800,000 house, you’re going to need to borrow $700,000. That means your LVR is 700,000 / 800,000 x 100, or 87.5%. This is quite a high LVR, which shows that you represent some risk to the lender in terms of making (and meeting) repayments.
If you have a deposit of $125,000 and you wish to buy a $500,000 property, you’ll need to borrow $375,000. In this scenario, your LVR is 375,000 / 500,000 x 100, or 75%. This LVR presents less risk to the lender.
When it comes to your borrowing power, your LVR should be typically no higher than 60% for low documentation (low doc) loans, no higher than 80% for borrowers who want to avoid Lender’s Mortgage Insurance (LMI), and no higher than 95% if you are borrowing from a mainstream lender.
Our advisers can assist you in sourcing the most suitable product based on your LVR and income, whether that be lowest cost or highest borrowing power.
uno is accredited with lenders covering 94% of the Australian market, which helps us offer the best solutions for your unique personal circumstances.
Related: Explaining Loan to Value Ratios
Related: Can uno provide home loans for unique financial circumstances?
How long does my loan approval last?
Once your lender approves your loan, you have 90 days to buy a property before that pre-approval expires. If you fail to purchase a home within that time frame, you will need to renew the pre-approval with the lender. This will most likely involve sending some recent pay slips. If you’ve changed jobs or purchased a new car, this may affect your borrowing power.
How can I increase my borrowing power? Here’s what a borrowing power calculator won’t tell you.
A good credit rating
Those seeking a home loan can push hard for a bargain by ensuring they have a good credit rating. The key is to pay off credit cards on time and have no other outstanding financial obligations that may raise a flag with a lender. You can be sure prospective lenders will be checking your credit rating, so make sure you are too. If you’re in good financial health, and you can prove it, you’ll be in a much stronger negotiating position.
Get a pay rise
Even the slightest rise in income can yield a tremendous increase in borrowing power. In fact, as little as $10,000 delivers up to $50,000 in newfound borrowing power. Getting a pay rise is one way to boost your borrowing capability.
Ditch the credit cards
Slicing up your credit cards is a great way to eliminate debt and maximise your borrowing power. With credit cards, lenders don’t just look at your spending patterns – they assess you based on your credit limit. So if you only spend $1,000 per month on your card, but have a limit of $10,000, lenders assess you on the full $10,000.
Plug your numbers into a borrowing power calculator (at the top of this page) to get an estimate of your loan size range. Once you have that home loan, uno can offer advice on how to maximise your repayments. Our qualified staff can also offer advice on knowing when to refinance and how to set up an offset account.
Which lender should I use?
Now that you know what your deposit can get you, it’s time to find a lender. There’s actually a surprisingly large difference between the amount different lenders will lend to the same customer. Type your details into uno’s home loan calculator and our technology will filter thousands of home loan combinations to reveal the best deals for you, and show you which lenders are more likely to offer the loan size that you’re looking for.
Related: Which lenders does uno work with?
Related: Is it Risky to Get Your Mortgage Through a Small Lender?
Does the amount I can borrow differ by lender?
The amount you can borrow can differ by lender. It is dependent on a range of factors. A uno mortgage broker knows what each lender is looking for and will work with you to find the best lender for your borrowing capacity. We talk to lenders daily and will use our knowledge to present the right loan options for you.
Plus, when you search for home loan rates online with uno, our technology actually shows you which lenders are more likely to consider lending you the loan size you are looking for. You can get started in searching for home loans and comparing lender borrowing power here.
uno works with major lenders CBA, National Australia Bank (NAB), St George Bank, Westpac and ANZ. We also work with a bunch of smaller lenders, including Adelaide Bank, AMP Bank, Bank of South Australia, Bankwest, MAS Home Loans, Macquarie Bank, ING Direct, Me Bank, Pepper Home Loans, Qudos CU, Redzed and Suncorp.
Will I need Lenders Mortgage Insurance (LMI)?
A uno expert can help you find out if you’ll need Lenders Mortgage Insurance and calculate what your LMI is likely to be. LMI is a fee charged by finance lenders to home buyers who have a deposit that is less than 20% of the property’s purchase price. It can vary significantly between lenders but is calculated based on two main risk variables: the loan amount; and the loan to value ratio (LVR). You can also see the cost of Lenders Mortgage Insurance for your situation by starting the search process with uno here.
How much is stamp duty?
Stamp duty is a percentage of the purchase price paid to the state government to cover the cost of the property ownership transfer. Payable in every Australian state and territory, the cost will vary depending on where you live and your circumstances (whether you’re a first home buyer, investor or owner-occupier). Stamp duty on a $1 million existing home for an owner-occupier in NSW, for example, is currently $40,768. Remember to factor in stamp duty when you’re working out how much money you have for a deposit as you cannot borrow stamp duty.
uno’s Stamp Duty Calculator provides an interactive guide on stamp duty costs.
If you have any questions about stamp duty, contact us on 133 866.
How much can I borrow from home equity?
If you already own a home or an investment property, you may qualify for a home equity loan, whereby you use the equity you have built up on another property to secure a new home loan. With enough equity, you won’t have to pay a cent towards a deposit. You can even find out how much equity you can borrow against with an online calculator.
Related: Selling a Home to Buy a New One
Related: Getting a Home Loan with No Deposit
Should I use a home loan calculator? The benefits of using a mortgage calculator in Australia.
Most home loan calculators use a few simple variables to estimate either a range, or a maximum amount, that you may be able to borrow. Some simply take into account whether the application is joint or single, and your monthly income and expenses. Others are more precise and include factors like marital status, the number of dependents, the repayment type (that is, whether your home loan repayments will include principal, or be interest only), and your credit card limit.
Because different lenders will lend different amounts to the same customer, the figure you’ll get from a mortgage calculator on one Australian website might be hundreds of thousands of dollars different from what you find on another website. This is why you shouldn’t take a home loan calculator result as gospel – you’ll need to go through the process of pre-approval before you can be confident about how much you can borrow.
At uno, we try to give you more confidence about your borrowing power upfront by pulling in the credit policies of all of our lenders (big, medium and small lenders from around Australia) and combine them into the one calculator that gives you a range of borrowing power. This gives you a broader view than using a calculator from a single lender.
From our blog
Want even more information about how refinancing your home loan could make a big difference to you?
Add these to your reading list.
Chris refinanced to pay for renovations
“All I was doing was servicing my old loan. I didn’t know I was allowed to use the equity to buy other things.”
A Banker Shares his Top 3 Tips for Avoiding Mortgage Stress
To find out how to avoid over-committing to a huge mortgage, we’ve sourced tips from someone who’s served time on the other side of the fence – in some of Australia’s biggest banks.
Switching Lenders Could Save You Thousands
Can’t be bothered switching? Think it’s too soon to refinance? Delve a little deeper and you’ll realise the potential savings are enormous, writes Nicole Pedersen-McKinnon.
uno is an online mortgage broker. The information above is general in nature, and you should always seek professional advice when making financial decisions.
*WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rate is calculated on the basis of a loan of $150,000 over a term of 25 years.
** Comparing the mean interest rate of 4.27% among mortgage customers who compare their rate every six months with the mean rate of 4.58% among those who never compare using a $500,000 principal and interest loan over a 30-year period.
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