How much can you borrow for a mortgage (and how much should you borrow)?

November 27, 2023

Key takeaways

  • An understanding of the factors that influence the amount you can borrow for a mortgage, such as income and expenses, Loan-to-Value Ratio, credit history, and employment stability. 

  • What steps you should take when considering how much to borrow, including consideration of future plans and goals, determining your capability to repay over a long term, and stress testing. 

How much can you borrow for a mortgage (and how much should you borrow)?

Buying a home is a major financial decision. For most of us, it is the most substantial investment we will make in our lifetime. 

Typically, securing a mortgage is necessary to achieve this dream, so it’s essential to understand how much you can borrow responsibly and what factors to consider when determining the appropriate borrowing amount. 

This guide provides you with a comprehensive understanding of how your mortgage borrowing power is calculated and how to make informed decisions about borrowing responsibly.

How much can you borrow?

Several factors influence the amount you can borrow for a mortgage in Australia. The key considerations are:

  • Income and expenses – Lenders typically assess your borrowing capacity based on your income and expenses. The higher your income and the lower your expenses, the more you can borrow. Lenders calculate your “serviceability” by considering your gross income, regular expenses, credit card debts, and any other loans you have. Your income and employment status play a pivotal role in determining the amount you can borrow. Stable employment history and job security are essential factors considered by lenders to assess your ability to repay the mortgage.

  • Loan-to-Value Ratio (LVR) – The Loan-to-Value Ratio (LVR) is the percentage of the property’s value that you want to borrow. In Australia, most lenders will lend up to 80% of the property’s value without requiring you to pay for Lenders Mortgage Insurance (LMI). If you need to borrow more than 80% of the property’s value, LMI will be added to your loan, increasing your borrowing costs.

  • Interest rates and loan terms – The interest rate on your mortgage plays a significant role in determining how much you can borrow. Higher interest rates will decrease your borrowing capacity as your loan repayments will be more substantial. The loan term also affects your borrowing capacity; longer terms mean lower repayments but might impact your eligibility for a higher loan amount.

  • Credit history – Lenders assess your credit history to determine your creditworthiness. A strong credit history will positively impact your borrowing capacity, while a poor credit history might limit the amount you can borrow or lead to higher interest rates.

  • Employment stability – Stable employment with a steady income stream reassures lenders about your ability to meet mortgage repayments. If you have a consistent employment history, it can improve your borrowing capacity.

  • Existing debts and liabilities – If you have other outstanding debts or liabilities, such as personal loans or credit card debt, it will affect your borrowing capacity. Lenders take into account your living expenses and financial commitments when calculating your borrowing capacity. This includes regular expenses like groceries, utilities, childcare, and discretionary spending.

How much should you borrow?

While it’s essential to know how much you can borrow, it’s equally crucial to determine how much you should borrow responsibly. Taking on too much debt can put you at risk of financial strain and limit your ability to cope with unexpected circumstances. 

There are a number of considerations when deciding on an appropriate borrowing amount:

  • Budget and lifestyle – Create a detailed budget and consider your lifestyle and spending habits. Borrow an amount that allows you to maintain your desired lifestyle without excessive financial strain. 

  • Pre-qualification – Before actively searching for a property, it is advisable to get pre-qualified for a mortgage. Pre-qualification involves a preliminary assessment of your financial situation by a lender or mortgage broker. They will evaluate your income, credit history, and other financial details to estimate the amount you may be eligible to borrow.

  • Factor in unexpected expenses and avoid overextending yourself – It’s essential to have an emergency fund set aside to cover unexpected expenses, such as medical emergencies or sudden job loss. Don’t deplete your savings entirely to fund a larger mortgage.

Homeownership comes with various unexpected expenses, such as maintenance and repairs. It’s wise to have a financial buffer to handle these costs without stretching your budget to the limit.

Remember, whilst a lender may approve a significant mortgage amount, it’s essential to be realistic about what you can comfortably afford. Overextending yourself financially can lead to stress and financial strain in the long run, so it is wise to consider the following: 

  • Future plans – Consider your future plans, such as starting a family, changing careers, or further education. Taking these factors into account will help you decide upon a suitable mortgage amount that aligns with your life goals.

  • Stress testing – In recent years, Australian regulators have introduced stricter lending criteria, including stress testing. This involves assessing your ability to make repayments at higher interest rates to ensure you can afford the mortgage even if rates increase. Perform stress testing on your budget to ensure you can handle mortgage repayments if interest rates rise or your circumstances change.

  • Long-term sustainability – Think about the long-term sustainability of your borrowing decision. Choose a mortgage that allows you to manage repayments over the life of the loan.

  • Professional advice – Consult with a mortgage broker or speak with us and we can provide expert guidance tailored to your specific financial situation and goals.

This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at September 2023 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.

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