What is my borrowing capacity?

What is my borrowing capacity?

Kathryn Lee - 23 Jul, 2019

Before embarking on your search for your dream home it’s important you know your borrowing capacity. This will give you an indication of what you can afford or give you a reason to crack down on your spending in order to increase your borrowing power.

What does borrowing capacity mean?

Borrowing capacity is the sum of money someone is able to borrow from a lender. This amount varies for each individual according to their unique circumstances. On top of this, the amount a consumer can borrow changes with each lender, meaning the same person can have a number of borrowing capacities with different lenders.

How much could I borrow for a mortgage?

Each bank or lender has their own “assessment rate” which is used to calculate a consumer’s borrowing capacity.

This “assessment rate” changes according to how much risk the lender is willing to assume. This means across the market, one person with the same set of circumstances can have significant differences in how much they’re lent.

Along with an assessment rate, the lender will also consider a number of other factors. This includes your income, rental income, limits on your credit card, the number of dependents you have and your monthly cost of living. By looking to your income and expenses, the lender can determine what kind of repayments will be affordable to you.

How many times my salary can I borrow for a mortgage?

Your borrowing power or borrowing capacity is also controlled by a number of other factors meaning a certain salary does not inevitably translate into a certain sum.

A borrowing calculator can give you a rough estimate but, as previously mentioned, lenders have different assessments according to how much risk they are willing to take.

This calculator not only requires the value of your income but also your monthly living expenses and other financial commitments. After these deductions are made, you are then left with your monthly disposable income, giving a lender the absolute maximum amount left for a mortgage repayment.

Fittingly, as your income rises you are more likely to be left with more of a disposable income, meaning a larger loan amount is easier to attain. But, if you are a high–income earner with a lot of financial commitments, you still might be left with a low borrowing capacity.

How much should your mortgage be compared to your income?

The amount of money you can put towards a mortgage repayment depends on both your salary and your spending. In general, a good rule of thumb is the 28% rule – meaning mortgage repayments should be no more than 28% of your monthly income.

Of course, this rule is only a suggestion, and the amount of money you decide to put towards your mortgage repayments is entirely dependent on your situation. For example, if you are paying off student loans or a car by finance, perhaps you will want to decrease this percentage. The key is to not take on more than you can comfortably handle.

To put it in perspective, it might help to keep in mind the 2016 Census found the average mortgage holder spends only 16% of their income on housing costs (ABS). This is certainly a lot less than the 28% rule.

It’s important to remember, every situation is different, and the advice is fairly general and not for specific circumstances. If you’re still uncertain, it may help to use a borrowing calculator or mortgage broker who can tailor this information for your needs.

Can you borrow more than the house is worth to renovate?

There are several mortgage products you can use to fund a renovation, each with their own benefits and drawbacks. Be sure to look into each product further to decide if it is the right path for you.

  • A line of credit loan utilises your home equity to extend your credit limit. Home equity is the difference between the value of your house and the amount of money which remains on your home loan. A line of credit functions like a credit card, with a credit limit and interest paid on the outstanding balance.
  • A construction loan is designed to help buyers who are building a substantial amount of the house. These loans are paid out in instalments as renovations are gradually being completed.
  • A home loan top up is another way to tap into your home equity and “top up” your home loan. The amount you can increase your home loan will depend on your equity and current financial position.

Alternatively, if all else fails you can apply for a personal loan.

How much deposit do I need for a mortgage?

How much deposit do I need for 180k house?

It is recommended that a buyer makes a deposit of 20%. By doing this, the borrower avoids paying Lender’s Mortgage Insurance and reduces their chance of paying a higher interest rate due to their low deposit. For a 180k house, the buyer should save $36,000 to offer a 20% deposit.

Can I get a mortgage with no income?

Someone looking to secure a home loan must prove some stream of income to be able to meet the lending criteria. This individual does not need to be employed but must have some source of funds whether it be Centrelink payments, money from self-employment or a regular deposit into their account from shares or something similar. With no income, a mortgage will not be approved.

Do I qualify for a mortgage?

There are number of elements which need to be met to qualify for a mortgage. Based on these factors, lenders may or may not allow you to take out a mortgage.


You must be at least 18 to qualify for a home loan, and if you’re over 55 you must provide a written exit plan as lenders are more wary of offering a mortgage.


Lenders will want to know if you are a permanent resident of Australia. If you aren’t there may still be some loopholes for example if you’re married to an Australian resident.


Lenders will want to see evidence of income. Depending on your employment situation, there are several ways you can meet this:

  • Wage or salary statements 
  • Self–employment
  • Self–funded retirement (through superannuation)
  • Government income
  • Rental property earnings 
  • Investment proceeds 
  • Child support
  • Savings history 


All lenders will want to see proof of what you own. This includes vehicles, shares, property and land. If you’re a business owner, then your businesses goodwill and equipment are assets too. 


Lenders want to know if you have existing financial commitments. Debts usually include credit cards, personal loans, store cards and leases.

Credit score

Lenders will look at your credit score to evaluate your history of making repayments and what this may say about future repayments.

Can you take a mortgage out for more than the house is worth?

Borrowing more than the purchase price of a house is usually not offered by lenders. However, if you have a guarantor offering additional mortgage security, some lenders may allow you to borrow more than the price of the house, typically up to a maximum of 110%.

How do you calculate mortgage payments?

An estimate of your home loan repayments can be calculated based on your interest rate, loan amount and loan term. You will also need to put in your repayment frequency – monthly, fortnightly, weekly – and whether your loan is principal and interest or interest only.

This can be calculated using the eChoice Loan Repayment Calculator which will also provide your estimated total loan repayment and total interest payable.

How do selfemployed borrowers get a mortgage?

Self–employed borrowers can qualify for a mortgage by offering their past tax returns as evidence of their income. Most lenders believe they can make an assessment of your stability based on your tax returns. If your income has fluctuated a lot of these two years, this tends to make lenders cautious.

There is no universal method of interpreting these tax returns and have been used in a number of ways. For example:

  • Some lenders may use the last two years.
  • Another may use the most recent year’s income.
  • Another may take the average the two years income or take 120% of the lowest year’s income.
  • They may or may not then add back expenses shown on your returns.
The majority of lenders will also require that you’re self–employed for at least 2 to 3 years. A limited number of lenders will consider applications from people who have been self–employed for only a year. And, if you’ve been self–employed for less than one year, there aren’t many options available to you.

How much can I borrow if I’m selfemployed?

It doesn’t matter how much you earn or how regular your income is, being self–employed will undoubtedly be seen as a risk to lenders and will come with its own hurdles.

But just like everyone else, how much you can borrow will depend on your income, your financial commitments, your spending and saving. From there you can find out your borrowing capacity.

How can I get approved for a higher mortgage?

  • Shop around: Each lender has their very own assessment rate, so this may considerably change how much you are offered.
  • Reduce your debts: This allows you to come with less baggage and will make you appear like a more reliable borrower. For example, any credit card will be taken as a debt to its limit. So, a credit card with a limit of $15,000 will be considered $15,000 of debt. It may be wise to reduce these credit card limits.
  • Consolidate your debts: Having a lot of debts on file can appear unfavourable to a lender. Streamlining them into one not only makes it appear cleaner to the lender but could also help you budget better.
  • Have a good credit history: Pay all your bills on time, lower your credit cards limits and avoid reaching these limits.
  • Joint mortgage: More often than not, an application with multiple applicants are offered more than if they had borrowed on their own.
  • Choose the right mortgage product: Switching between products such as a fixed or variable home loan can mean a different mortgage amount.
  • Save a 20% deposit: A large deposit means you will avoid LMI and will appear more favourable to the lender with a good sum of savings to your name.

How can I get a mortgage with low income?

There are multiple ways a low–income earner can crack into the property market and it’s important to remember ‘income’ encompasses more than just your pay check. Income includes Centrelink payments, child support or any stream of money into your pocket.

  • Power comes with saving: coming with a 20% deposit shows the lender you are a good saver and don’t need to borrow most of the purchase price. It also means you avoid paying LMI and don’t risk increasing your interest rate.
  • Joint mortgage: Taking out a mortgage with someone else increases your chance of being approved.
  • Get a guarantor: A guarantor is someone who can step in should you default on your loan. They too will be legally bound by the contract and must prove they can make the repayments if you can’t.
  • What is your money worth: While you may not be able to buy in a metro area, other locations will be more affordable. Getting pre– approval will also help set your budget.

Can I get a mortgage with bad credit?

A credit score helps a lender know whether or not they should lend you money or give you credit. Your credit score is determined by looking at your credit report, at a point in time, to determine how trustworthy you appear as a borrower. This score includes personal details, as well as past history of borrowing and making repayments. If you have a history of unpaid or overdue repayments this will bring this score down and make it harder for you to secure a competitive mortgage.

Credit score bands are usually measured between 1–1,000 or 1–2,000. Equifax, Australia’s frontrunner in credit reporting, measures a below average or bad credit score as one between 0 to 509.

Although, you may have a bad score this doesn’t mean a securing a mortgage is impossible. Here’s what you can do:

  • Use a lender that doesn’t use a credit scoring system: While the majority of banks and institutions use a digital credit scoring system, instead deal with a real person who can assess your past hiccups in context.
  • Avoid paying Lender’s Mortgage Insurance (LMI): When you apply for a loan you must be approved by both the lender and a mortgage insurer who protects the lender. By putting at least 20% down you avoid paying LMI and will have one less hoop to jump through.
  • Show that you have improved your financial situation: Show that you are back on track with your rent, utilities and credit card bills.
  • Try specialist lenders: While the main banks may shut down your application, some specialist lenders are willing to assume a greater risk – but at a cost. Usually, it will only be offered with a higher interest rate, but you can stick it out until your credit score improves and refinance with a different lender.
  • Shop around but don’t make an application: The more unsuccessful applications you make, the lower your credit score will be.
  • Seek advice: a mortgage broker can predict which lenders will likely reject your application and give specialised advice according to your past history.

How do I save money for a mortgage?

It doesn’t matter if you’ve been saving for some time or whether you’re just starting, there is an infinite number of ways to save more. Of course, it will mean you’ll need to make a few changes to your spending habits, but this won’t be forever. Once you’re in your home, then you can look at reintroducing some of those luxuries.

Simple ways to save more include:

  • Reducing your clothing allowance: Focus on investing in timeless and durable clothing. With the average outfit costing $100 or more, over twelve months you could add thousands back to your savings.
  • Save on groceries – We all tend to over–buy when grocery shopping. We are tempted to buy into sales and gimmicks – but this doesn’t have to be the case. Before you go shopping, write a shopping list and then stick to it. Ditch the brand names for generic brands and look for specials to find the product that represents the best value. Additionally, supermarkets provide a ‘price per kilo’ indication beneath the advertised price, which is a useful way to compare similar products across brands.
  • Curtail buying coffee: The average Australian buys at least one coffee daily. At a cost of around $4 a cup, this adds up to a $28 spend weekly. Based on this, not buying coffee could save you $1,456 annually.
  • Limit eating out: If you eat out once a week, on average, you’ll spend $2,288 on dining out in a year. If you can, pick a day of the week and make it routine.
  • Reduce energy and water use:  Changing your bulbs to LED and turning off your power points after use can help lower your bill. Limiting your showers to five minutes and using low–flow shower heads, can also reduce water consumption.

Want to know more about how you can increase your borrowing capacity or just after some tailored advice on how to secure a mortgage with low borrowing capacity? eChoice has access to hundreds of products across a panel of multiple lenders, so we can help you find a competitive mortgage.

Words by Michelle Elias

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