How Much Can I Borrow? Understanding Your Borrowing Power

When you’re dreaming of your next big purchase—be it a home, a new car, or an investment property—the first question on your mind is often: “How much can I actually borrow?” Your borrowing power, also called borrowing capacity, is the maximum amount a lender is willing to loan you. It’s not a random figure—it’s carefully calculated based on your unique financial situation.

Understanding your borrowing power is key to setting realistic expectations and planning your financial future. The factors that influence this number is the first step to making an informed and confident financial decision.

What is Borrowing Power?

Borrowing power is the maximum amount a lender is willing to lend you based on your financial situation. It is determined by several factors including your income, expenses, debts, and credit history. Knowing your borrowing power helps you narrow down property options and prevents overextending financially.

Factors That Affect Your Borrowing Power

1. Your Income and Expenses

This is the most fundamental part of the equation. Lenders need to be sure you can comfortably make your repayments, even if interest rates rise. They do this by performing a serviceability assessment, which looks at your income versus your expenses.

• Income: Lenders will assess all your sources of income, including your salary, any rental income, and earnings from investments or a second job. Stable, full-time employment is generally viewed more favorably than casual or contract work, but all income streams are considered.
• Expenses: This is where you might be surprised. Lenders look beyond just your bills. They’ll scrutinize your bank statements to understand your spending habits. This includes everything from groceries and utilities to entertainment, subscriptions, and childcare costs. The goal is to get a clear picture of your household expenditure and how it impacts your ability to service a new loan.

2. Your Existing Debts

Any existing financial commitments will reduce your borrowing capacity. This includes:

• Credit Card Limits: Lenders often assess your credit card debt based on the limit, not just the balance. This is because you have the potential to use that full limit at any time. A high credit card limit, even if you pay it off monthly, can significantly reduce how much you can borrow.
• Personal Loans and Car Loans: Repayments on these debts are deducted from your income, directly lowering your borrowing capacity.
• Buy Now, Pay Later (BNPL): Services like Afterpay and Zip Pay are also considered a form of debt by lenders and can impact your eligibility and borrowing power

3. Your Credit Score

Your credit score is a numerical representation of your creditworthiness. It’s a key indicator for lenders, showing your history of managing debt and making timely payments. A strong credit score demonstrates to a lender that you are a reliable borrower, which can lead to a larger borrowing capacity or a more favorable interest rate. Conversely, a history of missed payments or defaults will negatively impact your score and borrowing power.

4. The Loan-to-Value Ratio (LVR) and Your Deposit

The LVR is the size of your loan compared to the value of the property you want to buy, expressed as a percentage. For example, if a property is valued at $500,000 and you need to borrow $400,000, the LVR is 80%.

Lenders prefer a lower LVR. The bigger your deposit, the lower your LVR and the less you need to borrow. A deposit of 20% or more is often seen as a strong indicator of financial discipline and can help you avoid paying for Lender’s Mortgage Insurance (LMI).

5. Other Factors to Consider

Interest Rates – The current interest rate environment can influence how much you can borrow. Lower rates generally allow for higher borrowing power.

• Interest Rate Buffers: To ensure you can handle future rate hikes, lenders apply a buffer to their assessment. This means they’ll calculate your loan repayments at a rate higher than the current one to test your ability to service the loan under stress.
• Number of Dependents: The more people who are financially dependent on you, the higher your living expenses are assumed to be.
• The Loan Term and Type: Choosing a longer loan term will lower your regular repayments, which can increase your borrowing capacity. However, it will also mean you pay more in interest over the life of the loan.

How to Calculate Your Borrowing Power

While only a lender can give you a definitive figure, you can get a good estimate by understanding the key metrics they use. A crucial one is the Debt-to-Income (DTI) ratio.

Your DTI ratio measures your total debt obligations against your gross (pre-tax) income. The formula is simple:

DTI Ratio=Total Debt/Gross Income​

Lenders use this ratio to see how much of your income is already committed to debt. In Australia, a DTI below 6 is generally considered strong, meaning your total debt is less than six times your annual income. The lower your DTI, the more favorably lenders will view your application.

Most lenders also consider other factors like income, expenses, credit score, and the size of your deposit. While online calculators are a great starting point, remember that a lender will perform a thorough assessment based on their specific lending criteria. For the most accurate estimate, a mortgage broker can provide guidance tailored to your situation.

How to Boost Your Borrowing Power

Knowing these factors, you can take proactive steps to improve your position before applying for a loan:

• Reduce Your Debts: Pay off credit cards, personal loans, and any BNPL debts you may have. Consider closing credit card accounts you don’t use.
• Cut Back on Expenses: Review your spending and identify areas where you can save. Lenders will be looking for a consistent record of manageable expenses in the months leading up to your application.
• Improve Your Credit Score: Check your credit report and address any inaccuracies. Make sure you pay all your bills on time.
• Save a Larger Deposit: The more you can save, the less you’ll need to borrow.
• Consider Interest Rates: Locking in a lower rate can help improve affordability.

Understanding your borrowing power is about taking control of your financial future. By being mindful of income, expenses, and debts, you can position yourself for a successful loan application and secure the funds you need.

Knowing how much you can borrow is the first step toward buying your dream home or making a smart investment—giving you the confidence to plan effectively and approach lenders with certainty.