Your borrowing power represents how much leverage you have when applying for a home loan. The balance between your income and expenses determines how much freedom you have to borrow money and make monthly repayments with interest.
If you are seeking to buy a property with a home loan, understanding your leverage as a borrower is an important first step. This gives you a better understanding of how much money you can borrow based on your current financial circumstances.
Borrowing power is calculated by breaking down your income and expenses to see how much you have leftover. This leftover amount is then compared against the interest rate and loan term to determine the maximum amount you could borrow and comfortably repay each month.
The way this metric is calculated and interpreted can vary significantly between lenders. For example, if you provide the same financial information to two different lenders, they may report your borrowing power very differently.
Borrowing power is calculated based on a custom model that can vary between different lenders. The borrowing power calculator on this page is only designed to indicate what you can borrow - you will only know the true amount if you get pre-approval for a home loan.
This borrowing power calculator does not take into account:
Click the 'Assumption' button on the calculator to view a full list of the assumptions it is governed by.
Keep in mind; your financial situation will undoubtedly change significantly over the standard term of 25 years that most home loans have. The living expenses you may need to pay are subject to change over the years, and there is no way to predict what financial commitments may emerge in that time. Knowing this, you should understand that having significant borrowing power now does not guarantee it will remain that way over the life of the loan.
Lenders mortgage insurance, stamp duty, variable rate vs fixed rate interest and a range of other small factors also need to be considered. The fees and charges different lenders package with their home loans are things you should know about when determining what you can afford to borrow.
The only way to improve your borrowing power is to improve your financial situation by raising your income and reducing your expenses. Getting a better paying job, eliminating existing debts, and reducing your general living expenses are all examples of actions you can take to increase your leverage as a borrower.
You also need to be aware of your credit history and how it impacts how much money you can borrow. If you have a poor credit record due to behaviour like exceeding credit card limits or defaulting on a loan, lenders will view you as a bigger risk.
Lenders don't want to give money to people who struggle to manage their financial commitments and make their home loan repayments on time. Unless you commit to gradually rebuilding your credit score, you may only be able to access high-interest loans where significant fees and charges apply for any delinquency.
Using credit cards responsibly and avoiding late fees or other loan delinquencies will also help you build a better credit score. Once your credit score is considered good or excellent, you'll be able to access home loans with better principal and interest.
Your borrowing power is important because it indicates the maximum loan amount you can access, given your current financial circumstances. It's worth getting an estimate of how much leverage you have so that you only apply for finance you're likely to be approved for.
If you overestimate your leverage and fail to get loan approval, evidence of this rejection can negatively impact your credit score. If your credit score is on the poor end of the spectrum, this can make it even harder for you to access an affordable home loan.
Understanding your leverage as a borrower is key if you want to access a home loan that's actually suitable for you. This ensures you'll be able to make home loan repayments and manage your existing financial commitments without experiencing financial hardship.
Your lender's AFSL and Australian Credit Licence indicate that they're regulated by the Australian Securities & Investments Commission (ASIC) and are bound to act as a responsible lender. Responsible lenders need to calculate your leverage when you apply for a home loan so that they don't risk approving you for finance you can't afford.
Knowing how much leverage you have allows you to apply for home loans with a principal and interest suited to you. This ensures that, based on your current financial circumstances, you shouldn't have any trouble making monthly repayments on time.