How lenders calculate how much you can borrow on your home loan

How lenders calculate how much you can borrow on your home loan

Kathryn Lee - 11 Jul, 2019

Ever wondered how a mortgage provider determines how much they’re going to lend you? If going for a loan remains a big, old mystery, here’s a bit of insight into what a lender is looking for, and how you can look better on paper, as they say.

Income and expenses

This is an overview of your incomings and outgoings and it includes everything from loans, to bills, to transport costs. Living expenses also include how much you spend on groceries, eating out, childcare and schooling fees and medical costs, to name only a few. Westpac recently told ABC News it would be updating its list to include things like AfterPay debts and streaming subscriptions.

Having said that, the degree to which your expenses will affect your loan depends on how much you earn versus how much you can save. Ask yourself, just how much of my weekly, fortnightly or monthly wage am I spending? Ultimately, the lender is looking to see how much cash you have left over to service any loan they grant you.

To be on the safe side, make sure you reign in spending at least three months prior to going for your loan to reassure your lender that you’re a trustworthy loan candidate.

Assets and collateral

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What will you have to offer your lender in the event you can’t repay your mortgage on income alone?

If you’re going for your first home loan, the lender will look at the value of the property you intend to buy. What is its value and, crucially, will it retain its value? For instance, according to AFR, some lenders have been reluctant to lend on very small properties, like studio apartments, due to limited marketing potential and therefore resale value. The location (is it near any proposed construction? Is it under a flight path?) and style of your property (does it have a niche aesthetic or broad appeal?) may also affect its value in the eyes of your lender.

Other assets of interest to your lender could include any businesses you own, collector items like valuable cars or artworks (are you sure you don’t have a Picasso lying around?), shares and other investments.

Your character

A big part of assessing your ‘character’, AKA your financial reliability, is via your credit history. Your credit history essentially proves or disproves your ability to pay off bills and debts, and a better credit score will give you more negotiating power in your mortgage. According to the Australian Securities and Investments Commission (ASIC) credit score is calculated by looking at the amount of credit you have borrowed, the number of credit applications or enquiries made, unpaid or overdue credit repayments, any other details relating to debts or finances, such as bankruptcy.

Personal relationships

Even if you’re seeking the loan solo, information regarding personal relationships will definitely come up in your loan application and is usually linked back to analysing expenses. For example, if you are single, you are most likely buying your groceries and footing your bills all on your own. Whereas, if you’re in a committed partnership you’re more likely sharing these very same expenses, putting you in a better place financially. The lender will also look at your dependents, particularly children, and the costs they are likely to incur in the future as well as the present.


We essentially covered savings under ‘income and expenses’, however, if your outgoings include take away every night and yet you still have $100,000 in the bank, dining out might not be such a big deal! It’s all relative.

With this in mind, the amount you can save – more specifically, the deposit you have saved – is a strong determining factor for your loan. It is suggested you have at least a 20% deposit ready to go, not only to avoid incurring a Lender’s Mortgage Insurance fee, but to put you in better financial stead with your lender.

External factors

Of course, greater economic factors will affect the amount of your loan and the interest rate at which it is offered. For instance, Australia’s economic vitality in the past few decades has helped lower interest rates, and although these remain relatively low at present, they are always subject to change. Having said that, variables tied to the economy will affect everyone and aren’t within your control – so best keep your eye on what you can control, like cutting back expenses and saving that deposit.

Whether you’re buying your first property or are have done this before, eChoice’s mortgage brokers can help you compare of hundreds of home loans so you can find your perfect fit.

Words by Rebecca Mitchell

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