Written by James Hurwood
Reviewed by Stephen Zeller
Last updated 10/01/2024
Confused by the concept of borrowing power? Luckily for you, Selling Houses Australia host, Andrew Winter, is here to help explain.
Our new and improved borrowing power calculator takes a closer look at your overall financial situation and aims to provide a more informed idea of your borrowing power. A report that’s tailored especially for you makes it “Simples!” to learn more about where you stand financially.
After a quick snapshot? Use the basic calculator below to get a quick, rough estimate of your borrowing power.
Calculations are provided by VisionAbacus Pty Ltd ACN 140 627 765 (VisionAbacus). Whilst every care is taken to ensure the accuracy of the information as a guide for costing, no responsibility is accepted by VisionAbacus for its accuracy. Please check with a mortgage broker, accountant, financial advisor or other suitably qualified professional for an accurate estimate. Compare the Market Pty Ltd takes no responsibility for the calculations or information provided on this website by VisionAbacus nor any liability for the accuracy of or reliance upon or use of such calculations or information. Before deciding to purchase any product you should calculate the actual costs (as the calculators contain general information only and may not suit your particular circumstances) and read the relevant product terms and conditions. Calculations are not an offer of credit and don’t include any applicable fees.
As General Manager of Money at Compare the Market, Stephen Zeller knows how important a firm understanding of one’s borrowing power is when house-hunting and trying to take out a home loan, so he’s passionate about making sure consumers know what their borrowing power is, and how borrowing power works. With that in mind, he has some borrowing power-related tips for you:
Even though you may pay down your credit card balance each month, lenders still consider your credit card limits and may assume it can be drawn to its limit the day after the loan settles. When applying for home loan finance, we can review your circumstances based on lower or no credit limits, which can significantly boost your borrowing power.
Don’t forget about student HELP (HECS) debts; these will be factored in when a lender is reviewing your borrowing power, and are one of the most common liabilities that are forgotten about. If you only have a minimal amount owing, you may want to consider paying this out prior to settlement, as it could positively affect your borrowing power.
There are many twists and turns when working out someone’s borrowing power, so you may want to speak with our Home Loan Specialists to help run through your circumstances in depth. Keep in mind that while it can be great finding out what your potential borrowing power is, you need to ask yourself if you would be comfortable having this amount of debt and whether you can reasonably make these repayments.
Your borrowing power is the amount of money a lender might potentially lend you based on your unique financial situation. Borrowing power is generally calculated using your regular income and living expenses, plus a few other factors.
These tend to include, but aren’t limited to:
Borrowing power is generally a more helpful yardstick than deposit size alone for prospective homebuyers. For example, you could have a $1 million deposit saved up, but that doesn’t mean you could afford to meet the interest repayments on a multi-million-dollar home loan.
Whereas borrowing power explicitly ballparks the amount you could potentially borrow, and the property values you could potentially afford based on how much you can afford to repay.
As we’ve mentioned, there are many different factors that can influence the amount of money a lender is willing to let you borrow. However, there are a few notable exceptions, including:
Many things can affect your borrowing power, so it may be worth going over some of the lesser-known factors that could have an impact on your borrowing power. These include:
You can generally increase your borrowing power by considering the factors that influence it and working on them individually. While some of these changes may not make an immediate difference, the impact on your borrowing power may prove greater than the sum of its parts over time.
Some steps you could take to increase your borrowing power include:
Your interest rate will influence the overall size of your ongoing mortgage repayments, making it one of the more important variables at play when calculating your borrowing power.
However, there is a second, indirect way in which a home loan’s interest rate can affect your borrowing power, and even your overall eligibility for any given home loan.
The Australian Prudential Regulation Authority (APRA) expects lenders to factor in something called a ‘serviceability buffer’ when assessing each and every home loan application they receive. The current minimum interest rate serviceability buffer is three percentage points, which means that lenders risk breaching their compliance requirements if they approve a home loan that the applicant can’t afford to repay a rate increase of three percentage points.¹
This measure is in place to protect borrowers against significant interest rate hikes, but it can cause a lot of headaches if you’re unaware of it and trying to get approval for a home loan.
So, keep that extra 3% in mind when you’re thinking about borrowing power. A certain home loan product may seem within your means based on your desired loan amount, but what if its advertised rate was 3% higher? Our home loan comparison tool will take this buffer into account when calculating your borrowing power.
N.B.: While we can provide you with an approximate idea of how much you may be able to afford to borrow, it should only be taken as a guide rather than a formal pre-qualification, as our borrowing power calculations don’t reflect the individual and varying serviceability standards of each lender.
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.