One of the first questions most first home buyers ask is:
"How much can I actually borrow?"
It is a great question, and the answer is not just based on your income. Lenders look at a range of factors to work out your borrowing capacity. Here is a simple breakdown of what really matters.
What determines your borrowing power?
1. Your income
This is the starting point. Lenders will look at:
- Your base salary or wages
- Overtime, bonuses or commissions (if consistent)
- Any additional income, such as rental income
The more stable and consistent your income, the stronger your borrowing position.
2. Your expenses
This is where a lot of people get caught out. Banks do not just take your word for spending. They assess:
- Living expenses (groceries, bills, lifestyle)
- Existing commitments (car loans, personal loans, credit cards)
Higher expenses mean lower borrowing capacity.
3. Existing debts
Any current debts reduce how much you can borrow. This includes:
- Credit cards (even if unused, the limits count)
- Car loans
- Buy Now Pay Later accounts
Reducing or closing debts can often increase borrowing power.
4. Interest rates and buffers
Lenders assess your loan at a higher "stress test" rate, not just the actual rate you will pay. This is to make sure you can still afford repayments if rates rise. This buffer can significantly impact how much you are approved for.
5. Your deposit
Your deposit affects how much you need to borrow, and whether you pay Lenders Mortgage Insurance (LMI). Generally a 5% to 20% deposit is common for first home buyers, and a larger deposit can improve your position and options.
6. Employment type and stability
Lenders prefer full-time or stable employment and a consistent income history. If you are self-employed or casual, you can still borrow, but the requirements are a bit stricter.
What does this mean in real terms?
Two people on the same income can have very different borrowing capacities depending on their spending habits, debts, lifestyle and deposit. That is why online calculators can only give a rough guide.
The biggest mistake first home buyers make
Many buyers look at property prices first, before understanding what they can comfortably borrow. This can lead to looking at the wrong price range, missing opportunities, and wasting time at inspections.
The bottom line
Your borrowing power is a mix of income, expenses, debts, deposit and lending policy. There is no one size fits all answer, but getting clarity early makes the whole process a lot smoother.
If you are not sure where you sit, it is worth having a quick chat and running the numbers properly. It can give you a clear plan before you start house hunting.