If you’re in the market for a new home, at some point you’ll probably start wondering how much you can afford to spend. It’s a pretty important question, after all. 

Figuring out the magic number will let you whittle down your list of potential properties, shaving off the luxury beachside mansions that aren’t in your budget, as well as the ‘renovator’s delights’ that you’d be better off avoiding if you can afford to.

For most buyers, the amount that you can afford to spend will depend on how much you can borrow from a lender. Before you apply for a loan, it’s worth keeping in mind some of the factors that will influence that amount.

One very easy way to figure that out, is by using online calculators to get some insights. For example Borrowing Limit Home Loan calculators will provide a very basic estimate to help give you an understanding of where your budget lies.

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7 Factors that will influence your borrowing capacity

1. Income

If you want to borrow a lot of money – and houses usually cost a lot of money – your lender will want to be confident that you can pay it back. Your income, both from regular employment as well as things like investments, will provide a pretty good indicator of how much you can afford to repay on a regular basis.

If you’re purchasing a home with another person, the lender will take your combined income into account, so your borrowing capacity may be greater.

2. Financial commitments

Of course, your income only offers a partial picture of your ability to make repayments. Your financial commitments are also important to consider; you might have a sizable income, but if most of it is already committed to other payments, your capacity to make regular repayments on a home loan could still be considered very low.

Such financial commitments could include things like:

• Credit card debt
• Personal loans
• Car financing

3. Living expenses

Your regular living expenses will be considered alongside your income and ongoing financial commitments, to provide a clearer picture of your capacity to repay a home loan. Your living expenses may include things like:

• School fees
• Childcare
• Utilities
• Insurance

4. Savings

If you have gradually saved a large deposit over time (well done!), this demonstrates an ability to regularly put aside a portion of your income. A base of 20% of the value of the property is a good goal to aim towards, so that you can avoid paying Lender’s Mortgage Insurance (LMI). However, it is still possible to purchase a home with less than the recommended 20% deposit.

If you are in the process of or want to start saving for a home, using a savings calculator is a good place to start figuring out when you will be able to buy a home.

Savings & term deposit calculator

5. Loan period

The details of the loan in which you’re interested can affect the amount that you’re able to borrow. These details include the length of the loan period. Often the longer the loan period (up to a maximum 30 years), the more affordable loan repayments can be.

6. The value of the property

Your lender will conduct their own property valuation to confirm and be certain of the property’s value and make sure you are paying a fair price.

7. Credit history

Your credit score, which is informed by your credit history, plays a pretty big role in determining whether you’ll qualify for a home loan, and how much you can borrow if you do. If you have a spotless history, having spent your life paying bills on time, your credit score will reflect that.

However, there are a few things that can negatively affect your credit score, including the following:

• Making lots of credit applications (credit cards, personal loans, home loans, etc.) in a short period. This creates the impression of financial instability and high lending risk.
• Failing to pay bills or meet loan repayments, or being late in making payment.
• Bankruptcies and insolvencies.

You can find out your own credit score via several different providers, which will give you much greater visibility over your own financial situation and your likelihood of having your desired loan amount approved.

If you find out that you have a negative credit score, don’t stress too much! It’s not all bad news. Incidents will only count against your credit score for a fixed period (which varies depending on the incident), meaning that bad credit scores can be repaired over time. If you make sure that you pay bills on time and avoid missing loan repayments, you can put yourself in a much better borrowing position in future.

If you have questions or would like to discuss your borrowing options further, please send us an enquiry or book an appointment with a Suncorp Bank home loan expert.

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Published 05 November 2022