How much can you borrow?

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You’ve probably already tried an online borrowing calculator.

Income in. Expenses in. Click a button.

Congratulations! Apparently you can borrow $742,381.

Except… it’s not quite that simple.

How much you can borrow depends on your circumstances and how different lenders assess them. Two lenders can look at the same person and come up with different results.

Let’s look at what actually matters.

 When a lender works out your borrowing capacity, they’ll generally consider things like:

• Your income
• Your living expenses
• Credit card limits
• Personal and car loans
• HECS-HELP or other student debt
• Dependants
• Your deposit
• The interest rate and loan term
• Other financial commitments

They’ll then assess whether you could afford the proposed loan repayments, including an allowance for interest rates being higher than the actual rate you’ll initially pay.

Different lenders have different policies and assessment methods, which is why your borrowing capacity can vary from one lender to another.

 Borrowing capacity is an estimate of how much a lender may be prepared to lend you based on its assessment of your financial position.

But there’s another number that's just as important:

How much are you comfortable borrowing?

A lender might assess that you can borrow a certain amount, but that doesn't mean you need to borrow all of it.

You still want money for holidays, dinners, hobbies, emergencies and generally having a life.

Your home loan needs to work alongside those things too.

 These are also two different things.

You might be able to borrow $600,000, but that doesn't automatically mean you can buy a $600,000 property.

Your purchase price also depends on things like:

• Your deposit
• Purchase costs
• Stamp duty or available concessions
• Government scheme eligibility
• The amount you want to keep aside as a financial buffer

This is why working out a realistic property budget involves more than just asking:

“What's the maximum the bank will lend me?”

 Sometimes there may be things affecting your borrowing position that are worth reviewing.

For example:

Even if you don't owe anything on your credit card, the limit itself may be taken into account by a lender.

Car loans, personal loans, buy now pay later facilities and other commitments can affect borrowing capacity.

Lenders consider your living expenses when assessing whether you can afford a loan.

Different lenders assess income, expenses and existing commitments differently.

This doesn't mean you should start cancelling cards or paying off debts just to increase a calculator result.

The first step is understanding what is actually affecting your position.