How many times my salary can I borrow?

When looking to enter into the property market, the first question you will find yourself asking is ‘’How much can I borrow or should borrow based on my salary’’. 

Lenders generally assume that 30% of your income can be used to make your home loan repayments.

With that said, the actual amount that you can borrow for a mortgage in Australia will depend on several factors, including your: 

• Income
• credit score, and 
• Debt-to-income ratio and more (see below)

It is also worth mentioning that the maximum amount that you can borrow for a mortgage may be different from the amount that you can afford to borrow. Even if a lender is willing to lend you a certain amount of money, you should only borrow what you can comfortably afford to repay based on your income and financial situation. This can help to prevent mortgage stress and ensure that you are able to make your monthly mortgage payments on time.

How much of your salary can you afford to spend on repayments?

When it comes to taking out a home loan in Australia, one of the key questions you need to ask yourself is: How much of your salary can you afford to spend on repayments? This is an important consideration because it will determine how much you can borrow and what type of home loan you can afford. 

Here's a closer look at how much of your salary you can afford to spend on home loan repayments in Australia: 

• The 30% rule: One of the key guidelines that many lenders use when determining how much you can borrow on a home loan is the 30% rule. This rule states that your monthly mortgage repayments should not exceed 30% of your gross income. So, if you earn $5,000 per month, your monthly mortgage repayments should be no more than $1,500.
  
  
• The 50% rule: Some experts recommend using the 50% rule instead of the 30% rule, which states that your monthly mortgage repayments should not exceed 50% of your gross income. So, using the same example as above, your monthly mortgage repayments would be no more than $2,500.
  

Other factors to consider: You should always consider your other debts and financial obligations, your savings and investment goals, and your overall financial stability and security. Overall, the amount of your salary that you can afford to spend on home loan repayments in Australia will depend on a range of factors, including your income, your other debts and expenses, and your overall financial goals and priorities.

How is your salary considered during a home loan application process?

If you're applying for a home loan in Australia, your salary is an important factor that lenders will consider when evaluating your application. Here's a detailed look at how your salary is considered during the home loan application process in Australia: 

• Gross income: When applying for a home loan, lenders will typically ask you to provide information about your gross income, which is the total amount of money you earn before taxes and other deductions. This is an important factor because it provides a clear picture of your overall earning potential and helps lenders to determine how much you can afford to borrow.
  
  
• Net income: In addition to looking at your gross income, lenders might also consider your net income, which is your gross income minus taxes and other deductions. This is important because it provides a more accurate picture of the amount of money you have available to make your monthly mortgage payments.
  
  
• Income stability: Lenders will also typically consider the stability of your income when evaluating your home loan application. This can include looking at factors such as the length of time you've been in your current job, the stability of your industry, and whether you have a history of consistent income growth. 
• Other income sources: In addition to your salary, lenders might also consider other sources of income when evaluating your home loan application. This could include income from investments, rental properties, or other sources. If you have other sources of income, it's important to provide this information to your lender so they can take it into account when determining your borrowing capacity.
  
  
• Affordability: Ultimately, the amount you can borrow on a home loan in Australia will depend on your ability to afford the monthly mortgage payments. Lenders will typically use an affordability calculator to determine how much you can borrow based on your income and expenses. This calculation takes into account factors such as your income, debts, and other financial obligations. 

Overall, your salary is an important factor that lenders will consider when evaluating your home loan application in Australia.

What other factors do lenders use to determine your borrowing capacity?:

In addition to your income, credit score, and debt-to-income ratio, lenders may also consider other factors when determining your borrowing capacity. These may include:

Employment history and income stability: Lenders may look at how long you have been with your current employer, as well as your overall employment history, to determine your income stability. A stable job and consistent income may indicate to lenders that you are more likely to be able to repay the loan.

Assets: Lenders may also consider any assets you have, such as savings accounts, stocks, or real estate, when determining your borrowing capacity. Having a significant amount of assets may indicate to lenders that you have the financial means to repay the loan. 

‍Debt obligations: Lenders will also consider any existing debt obligations you have, such as credit card bills, student loans, or car payments, when determining your borrowing capacity. Having a high amount of existing debt may indicate to lenders that you may not be able to take on additional debt. 

‍Credit score: Your credit score is an important factor that lenders will consider when determining how much you can borrow for a mortgage. Borrowers with a higher credit score may be able to borrow more than those with a lower credit score, as a higher credit score indicates a history of responsible borrowing and a lower risk of default.

Down payment: The amount of money you are able to put down as a down payment may also be a factor in your borrowing capacity. A larger down payment may indicate to lenders that you have the financial means to repay the loan and may allow you to borrow more.

Type of loan: The type of loan you are seeking may also be a factor in your borrowing capacity. For example, a mortgage loan may allow you to borrow more money than a personal loan.

Debt-to-income ratio: Your debt-to-income ratio is another important factor that lenders will consider when determining how much you can borrow for a mortgage. This ratio is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders may require you to have a lower debt-to-income ratio in order to borrow more money for a mortgage.

Type of property: The type of property you are looking to purchase can also affect how much you can borrow for a mortgage. For example, lenders may be more conservative when lending for an investment property or a property in a remote location, and may require a higher down payment or a lower loan-to-value ratio.

How to increase your borrowing capacity?

Here are some ways to increase your borrowing capacity for a home loan in Australia: 

‍Improve your credit score: Your credit score is a key factor that lenders consider when determining your borrowing capacity. A high credit score indicates to lenders that you are a responsible borrower who is likely to make your loan payments on time. If your credit score is not as high as you'd like it to be, there are steps you can take to improve it. These can include paying your bills on time, reducing your credit card balances, and avoiding applying for new credit unnecessarily. 

‍Boost your income: Lenders generally consider your income when determining how much you can borrow. If you're looking to increase your borrowing capacity, one way to do this is to increase your income. This could mean getting a raise at your current job, taking on additional work or freelance projects, or starting a side business. 

‍Reduce your expenses: Another way to increase your borrowing capacity is to reduce your expenses. This can include cutting back on unnecessary spending, such as dining out or subscription services, and finding ways to save on your monthly bills. By reducing your expenses, you can free up more of your income to put towards a home loan. 

‍Bolster your savings: Lenders also consider the amount of savings or assets you have when determining your borrowing capacity. If you have a significant amount of money saved, it can help increase your borrowing capacity. One way to do this is to start a savings plan and set aside a portion of your income each month.

Find out your borrowing power with our calculator:

Use the Joust borrowing power calculator to determine how much you can borrow based on your current financial position

What are the risks of borrowing to much?

Borrowing too much on your home loan in Australia can have a number of negative consequences. Some of the risks of borrowing too much on your home loan include: 

• Mortgage stress: Borrowing too much on your home loan can put a strain on your finances, making it difficult to make your monthly mortgage payments and leaving you with less money for other expenses. This can lead to financial stress and anxiety, which can have a negative impact on your overall quality of life.
  
  
• Negative equity: If the value of your property declines, you could end up with negative equity, which means that you owe more on your mortgage than your property is worth. This can make it difficult to sell your property or to refinance your loan, and could leave you in a difficult financial situation.
  
  
• Difficulty making repayments: If you borrow too much on your home loan, you may find it difficult to make your monthly mortgage payments, particularly if interest rates rise or your financial situation changes. This could lead to late payments, missed payments, or even default on your loan, which could have serious consequences for your credit score and your ability to borrow in the future.
  
  
• Limited flexibility: Borrowing too much on your home loan can also limit your flexibility and prevent you from taking advantage of other opportunities. For example, if you have a large mortgage, you may not be able to afford to make other investments or to take on additional debt, such as a car loan or a personal loan.

Get the home loan interest rate you deserve, on the salary you have

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*The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Joust recommends that you consider whether it is appropriate for your circumstances. Joust recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

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