When you apply for a home loan, it is possible that the amount you can borrow is different from the amount you are comfortable repaying. Why? Because, while banks take into account several factors, including your spending habits, to calculate your borrowing capacity, only you are aware of your plans, circumstances and personality.

Thus, before you decide to buy a house, it is crucial not only to consider how much you can borrow but also how much you should borrow.

How lenders calculate your borrowing capacity?

Lenders take into account several factors, apart from your income and expenditure, to calculate the amount of debt you can service.

This includes:

Your gross income – Apart from your basic salary, certain lenders will also take into account any regular bonus income or overtime that you earn. Besides, up to 80 percent of the rental income from an investment property will also be built into your income.

Your expenses – Lenders will assess your application on the basis of your disposable income having deducted your total expenses from your gross income. This includes your child’s school fees and the gym membership you are probably not using.

Your Debt-to-Income RatioDebt-to-income ratio is an essential figure that lenders take into account while deciding your loan serviceability. The ratio identifies how much of your monthly income is applied towards the payment of recurring debts such as credit card payment, personal debt, mortgage repayments or car loan.

In general, a score over 40 means you are spending too much money to meet your debts, leaving little disposable income to meet your other expenses. Thus, with a high debt-to-income ratio, banks consider you at higher risk for default, affecting your borrowing capacity adversely.

You can use this online calculator to know your borrowing capacity.

How much can I borrow?

The amount of deposit you have saved up affects your mortgage size to a great extent. Ideally, you are required to save up to 20 percent of the purchase price as a deposit because most lenders cap the mortgage size to 80 percent of a property’s value.

However, in the face of the increasing property prices, saving a 20 percent deposit is a herculean task. Today, some borrowers do not have much saved up as a deposit but have a decent income to afford a home loan. In case you have a low deposit, some lenders will still let you borrow up to 95 percent of the property’s value if you pay lenders mortgage insurance (LMI). A parental guarantee can help you secure a 105% LVR loan in some cases. Speak to a mortgage broker to know more.

How much should I borrow?

When you apply for a home loan, it often happens that the amount you are eligible for is different from the amount you should borrow. It is possible that you find yourself eligible for a smaller amount than you can service. While it is a disappointing situation, you can follow these simple tips to boost your borrowing capacity.

Alternately, you may be offered an amount much larger than you think you can comfortably service. Here, instead of applying for the entire amount available to you, it is wiser to crunch the numbers and see how much debt you can service without compromising on the necessities.

Experts warn that using more than 30 percent of your income towards your mortgage repayment can lead to mortgage stress. 

You can calculate your monthly repayments here

The importance of a household budget

Purchasing a home is a big financial decision that will affect your lifestyle for a long time to come. While you would save up on the rent, more chances are you would have to cut down a lot of frivolous spending, trading take-outs for home cooked food and skipping your Starbucks latte most mornings, to meet your monthly mortgage repayments successfully.

However, the sacrifices that you need to make will depend squarely on the amount you decide to borrow. Thus, it is essential to track your monthly expenditure to get a fair idea of how much you can save and put towards your home loan repayment.

Preparing a reasonable household budget will help you decide how much debt you can afford to take on currently.

Not only does a budget help you maximise your savings, but it also gives you a fair idea of how much money you can dispose each month towards your mortgage repayment.

To check what size of the home loan you can service without compromising on the basics:

You must plan ahead – We suggest you calculate your repayments at a rate at least 3 percent higher than the ongoing mortgage rate to protect yourself from future interest rate fluctuations. 

Consider any change in circumstances – It is also advisable to take into account your future plans, which your lender isn’t aware of. For example, if you intend to expand your family soon or take a sabbatical from work, it is going to affect your home loan serviceability.

Deliberate other costs – When you purchase a home, several costs add up to the price. These include:

– Stamp duty (calculate here)
– Legal fees
– Mortgage application fees
– House inspection
– Maintenance fees
– Insurance premium
– Cost of essential home loan features

(First time home buyers may be eligible for grants and stamp duty concessions in individual states. Know more here.)

Make educated choices

Lenders are quite strict while assessing your mortgage application as they are mandated by law to lend responsibly. However, despite sophisticated mechanisms in place by banks to calculate your borrowing capacity, only you are capable of judging how much debt you can service comfortably – as only you are aware of your circumstances and personality. Thus, it is prudent to assess your situation earnestly to ensure you bite no more than you can chew – rather than taking a mountain of debt you cannot afford to service.

At HashChing, our mortgage brokers can help you understand your options better apart from offering you competitive home loan deals from over 60 lenders across Australia you can compare here.


By Vidhu Bajaj,
HashChing Content Writer



HashChing is helping Australians by providing access to pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.

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