Can I Afford This Property? The Honest Calculation

Understanding your borrowing power is the first step to buying property in Australia. Most people either underestimate what they can borrow or overestimate their capacity, leading to disappointment or financial strain. This guide shows you exactly how lenders calculate borrowing power, what reduces it, and how to know your true affordability before you apply for a loan.

How Australian Banks Calculate Your Borrowing Power

Australian lenders use two primary tools to assess your borrowing power: the Debt-to-Income (DTI) ratio and a mandatory stress test called the serviceability buffer. These rules are set by APRA serviceability requirements and strictly enforced across all major banks.

The formula lenders use is:

• Maximum loan = (Net monthly income minus existing debt repayments minus living expenses) divided by monthly repayment per $1,000 borrowed
• Stress test: Lenders assess your ability to repay at your actual interest rate PLUS a 3% buffer. If your rate is 6.2%, they test serviceability at 9.2%
• DTI cap: Most lenders cap total debt at 6 to 8 times your gross annual income

This means your actual borrowing power depends on three factors: your income, your existing debts, and your living expenses. Banks verify all three categories rigorously.

Quick Affordability Calculation: What Can You Borrow?

At current interest rates (approximately 6.0% to 6.5% for owner-occupiers in 2026), here are typical monthly repayments for common loan amounts over 30 years:

• $500,000 loan: approximately $3,000 per month (principal and interest, 30 years, 6.2%)
• $750,000 loan: approximately $4,500 per month
• $1,000,000 loan: approximately $6,100 per month
• $1,500,000 loan: approximately $9,100 per month

The general rule financial advisers recommend is that your mortgage repayments should not exceed 30% to 35% of your gross household income for comfortable servicing. Exceeding this threshold increases financial stress and reduces your borrowing power for future loans.

Real Example: A Household Earning $150,000

A household with $150,000 gross annual income ($12,500 per month) should target repayments of $3,750 to $4,375 per month. At 6.2% interest, this supports a loan of approximately $625,000 to $730,000, depending on other debts and expenses.

What Reduces Your Borrowing Power

Lenders reduce your borrowing power based on existing financial commitments and living expenses. Here are the most common factors that lower your capacity:

• Existing personal loans, car loans, and HECS debt: Every $100 per month in repayments reduces your borrowing power by approximately $20,000 to $25,000
• Credit card limits: Lenders count the full credit limit (not just your balance). A $10,000 limit reduces borrowing power by $30,000 to $50,000
• Declared living expenses: Banks use the higher of your declared expenses or the Household Expenditure Measure (HEM) benchmark
• Dependants: Each dependent child reduces borrowing power by approximately $30,000 to $50,000
• Employment type: Casual or contract workers are assessed more conservatively than permanent employees. Self-employed borrowers need two years of tax returns

Before applying, pay down small debts, close unused credit cards, and reduce credit limits to maximise your borrowing power.

What You Need Beyond the Loan: Purchase Costs

The purchase price is only part of the total cost. Budget for these additional expenses on top of the property price:

• Stamp duty: In Victoria, approximately $40,000 on an $800,000 property (non-first-home buyers). In New South Wales, approximately $31,000 on $800,000
• Conveyancing and legal fees: $1,500 to $3,000
• Building and pest inspection: $500 to $800
• Lender application and valuation fees: $0 to $600
• Lenders Mortgage Insurance (LMI): If your deposit is below 20%, LMI can cost $10,000 to $30,000 or more, depending on loan size

Total purchase costs typically add 4% to 6% on top of the property price. For an $800,000 property, budget an additional $32,000 to $48,000 in costs.

Understanding Debt-to-Income Ratios

The debt-to-income ratios measure your total debt (mortgage plus other loans) as a multiple of your annual income. Most Australian lenders cap DTI at 6 to 8 times gross income.

For example, if your household earns $150,000 per year, your maximum total debt is $900,000 to $1,200,000 (including the new mortgage). If you already have $100,000 in other debts, your new mortgage is capped at $800,000 to $1,100,000.

How to Increase Your Borrowing Power

If your borrowing power falls short of your target, consider these strategies:

• Increase your income: Add a second income, bonuses, or overtime (documented for at least 3 to 6 months)
• Reduce existing debts: Pay off personal loans and car loans before applying
• Close unused credit cards: Even with zero balance, the limit reduces your capacity
• Lower your living expenses: Reduce discretionary spending and provide evidence to the lender
• Add a co-borrower: A partner or family member with income can significantly increase capacity
• Consider a guarantor: A parent or family member can guarantee part of the loan to avoid LMI

If you are considering refinancing to access equity or reduce repayments, read our guide on should I refinance my mortgage for detailed analysis.

Investment Property vs Owner-Occupied: Borrowing Power Differences

Investment properties require higher deposits (typically 20% minimum) and attract higher interest rates (0.3% to 0.6% above owner-occupier rates). Lenders also only count 80% of rental income when assessing serviceability, reducing your borrowing power by approximately 15% to 20% compared to an owner-occupied purchase.

If you are deciding between positively or negatively geared property, understand that negatively geared properties reduce your borrowing power for future loans because they create a cash-flow deficit.

Use the Collings Borrowing Power Calculator

Access the GeeVee-powered borrowing power calculator via the Collings portal for a personalised estimate based on your income, expenses, deposit, and existing debts. The calculator uses real lender criteria and provides an accurate pre-approval indication.

collings.com.au/portal (free, no broker fees, no obligation)

Frequently Asked Questions

What deposit do I need to buy a house in Australia?

The minimum deposit is 5% of the purchase price, but you will pay Lenders Mortgage Insurance (LMI) on any deposit below 20%. To avoid LMI, you need a 20% deposit. First-home buyers in Victoria can access stamp duty concessions and the First Home Owner Grant at lower deposit levels. The recommended deposit is 20% plus an additional 5% to cover purchase costs.

How much can I borrow with a $100,000 income?

With a $100,000 annual income, no dependants, and minimal debts, you can typically borrow $500,000 to $600,000, depending on your living expenses and interest rates. Adding a partner with similar income can increase borrowing power to $1,000,000 or more.

Does HECS debt affect my borrowing power?

Yes. HECS debt reduces your borrowing power because lenders count the repayment (calculated as a percentage of your income) as an existing debt. A $50,000 HECS debt earning $100,000 per year reduces borrowing power by approximately $80,000 to $100,000.

Can I borrow more than 6 times my income?

Some lenders allow DTI ratios above 6, but most cap total debt at 6 to 8 times gross income. High DTI loans are scrutinised more carefully and may require larger deposits or higher credit scores.

Related Posts

• should I refinance my mortgage
• positively or negatively geared property

Further Reading

• APRA serviceability requirements
• debt-to-income ratios