How much can I borrow?

These are terms that lenders use to describe how much you might be able to borrow, based on your financial situation. 

When it comes to home loans, things that affect your borrowing power include how much you earn, current debt repayments (like your credit card limits, or personal loans), number of dependants, how much you’ve saved as a deposit, and whether you have a guarantor.

It also depends on what you spend your money on day-to-day (living expenses). Lenders will consider things like school fees, utility bills, rent, as well as your entertainment and grocery spend, to ensure you’re able to realistically meet your home loan repayments over the life of the loan.

How can I increase my borrowing power?

There are some things that may help increase your home loan borrowing capacity:

• Reduce your credit limit on credit cards, or close any unused credit cards 
• Pay down debts, like personal loans
• Keep a good credit score
• Split your liabilities with a partner if you’re borrowing on your own
• Start or keep saving to demonstrate a good savings history.

You might also be able to increase the amount you can borrow by asking a family member to guarantee all or part of your loan. At Westpac, this is called a Family Security Guarantee and it could help you get into the market quicker.

What if I'm self-employed or a business owner?

Employment status can have an influence on your borrowing power, as it might be more complex to demonstrate your income if you’re in this position, and don't always have a regular salary for example. 

Every situation is different, and a home loan specialist can guide you on next steps.

Your limit on other debts, like credit cards and personal loans, might affect your borrowing power. Even if you’ve paid your credit card off completely, your home lender will still look at these limits as potential debt, which affects how much they’ll be willing to lend you.

Your history of repayments on debts can also come into play – called your credit score (or credit rating). Credit reports look at how much you’ve borrowed in the past, previous applications for credit and if you’ve missed payments on things like credit cards, bills or personal loans. 

Check your credit score and download a copy on the government’s MoneySmart website, before applying. If it’s not as strong as it could be, focus on paying down personal loans and credit cards or closing loan and credit accounts that you’re not using.

How do I calculate total credit card and overdraft limits?

Simply check your account statements or online banking dashboard. Each credit card and account with an overdraft should display a credit limit alongside the amount you’ve already borrowed from that credit account. If your bank doesn’t display overdraft limits online or in statements, give them a call and ask. 

An accurate summary of all your credit and overdraft accounts will help your lender process your application faster when you apply.

Before you learn how principal and interest home loan repayments differ from interest-only home loan repayments, you need to understand that a home loan balance is made up of two parts:

• The principal is the amount that you’ve borrowed with the home loan
• The interest is an amount your lender charges you based on your principal. It’s calculated daily as a percentage (your interest rate) of your principal and added to your balance every month.

Principal and interest home loan repayments help to pay down both the principal and interest charges on your home loan. This helps you reduce the principal with every repayment, which means you pay less and less interest over time.

If you choose interest-only repayments, you are only paying off the interest charges on your home loan – and not paying down the principal, which is the initial amount you borrowed. Your repayments may be lower with this repayment option, but you will end up paying more interest over time.

Read more about the difference between principal and interest and interest only repayments. 

While homebuyers tend to think in terms of how much savings/deposit or equity they have and an estimated property price, banks tend to talk about 'LVR' and have their own assessment of the value of the property. 

LVR is the 'loan-to-value ratio' – your loan amount divided by the lender's valuation of the property. It's given as a percentage to guide lenders and homebuyers. 

For example: A $400,000 home loan ÷ $480,000 valuation = 0.83 x 100 (for a percentage) = 83% LVR.

When working out your LVR, remember to base it on the bank’s valuation (if you have one) rather than the price you’re prepared to pay. 

Here's how a difference in your assumed property price and lender valuation can affect the deposit you need:

• $100k deposit ÷ $500k assumed price = 0.2 (x100 for a percentage) = 20% deposit
• $100k deposit ÷ $480k bank valuation = 0.21 (x100 for a percentage) = 21% deposit

The type of home loan and the interest rate associated with each type of loan will affect your borrowing power. 

The lower the interest rate, the more you can borrow and the lower any minimum repayment amounts will be. 

Try different values with the calculator above. You may notice that if you stretch the loan term out over a longer period (for example, from 20 years to 30 years) it might mean you can borrow more, however, it will increase the total amount of interest you will end up paying across the life of the loan. 

It's also a good idea to consider your repayments if interest rates were to rise. 

As a current home owner, you may want to consider using equity you’ve built up, to help buy your next home or investment property. Equity is the difference between your property’s current market value, and what you still owe on your home loan. 

Estimate your usable equity with this equity calculator.

What should I count as ‘investment property expenses’?

This can include everything involved in maintaining your investment property. The costs could include strata payments, maintenance expenses, utilities and council rates.

On one hand, you and the person (or people) you’re applying with may have more borrowing power – your collective assets, deposit and income means you may be able to borrow more than a single applicant. But, on the other side of the coin, you may have a greater collective total debt, and this might limit what you can borrow together. 

How do dependants (children) affect my borrowing power?

As with home loans, the responsibility of parenting lasts decades – and so do the associated costs. This is why the number of dependents you support financially plays a role in assessing your borrowing power. 

There are some standard calculations our credit team use to measure the financial impact each dependant can have - these numbers are factored into our home loan calculators. Ask your home loan specialist for more detail about how it's worked out. 

Contrary to popular belief, there is no rough calculation or rule around this. Your salary is certainly an important element in assessing how much you can borrow, but so are a number of other factors. For example, your expenses, credit history, any debt you have and your deposit. Each of these things presents us with information that helps us understand whether you could afford your repayments.

What do you mean by ‘other income’?

This could include bonuses or invoices paid for jobs other than your main one. It could also include interest earned on investments, like other properties or stocks you own.

How much deposit you’ve saved is important as it reduces the amount you need to borrow and the interest you need to pay. It's also important to a lender, as a smaller deposit comes with greater risk. If interest rates rise or unexpected expenses pop up and you’re borrowing at your maximum capacity, you may not be able to meet your repayments.

Typically, if you don’t have a deposit of 20% of the property’s bank valuation, you may need to pay lenders mortgage insurance (LMI)

Lenders mortgage insurance is an insurance cover that protects a lender if you can't meet required mortgage repayments and default on your loan. If you choose to use lenders mortgage insurance to increase your borrowing power, you can choose to add it to the loan balance, though keep in mind this means you’ll pay interest on it.

But if you do the maths and your deposit is simply too small right now, a strategy and a little bit of planning can help you get there. If you're a first home buyer check out this helpful guide to saving for a deposit.