How Much House Can I Afford?

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June 6, 2026

Understanding house affordability is the foundation of successful property ownership. Whether you are a first-time buyer or upgrading to a larger home, knowing your true purchasing power prevents financial stress and helps you target the right properties. House affordability depends on your income, savings, borrowing capacity, current interest rates, and lender serviceability criteria. This comprehensive guide breaks down every factor that determines how much you can borrow and afford.

What Factors Determine House Affordability?

Lenders assess your house affordability using strict serviceability ratios and lending criteria. Most Australian banks will lend up to 80 to 90 percent of the property value, known as the loan-to-value ratio (LVR). Your serviceability ratio determines whether you can comfortably afford the repayments without financial hardship.

Standard serviceability tests include:

Debt serviceability ratio: Typically 30 to 35 percent of your gross income can be allocated to mortgage repayments
Interest rate buffer: Lenders test your application at 3 percent above current rates to ensure you can handle future rate rises
Living expenses buffer: Banks calculate your household expenses using the Household Expenditure Measure (HEM) or your actual declared expenses, whichever is higher
Existing debt obligations: Credit cards, car loans, and personal loans reduce your borrowing capacity significantly

The Australian Prudential Regulation Authority (APRA) sets lending standards that banks must follow, which directly impact your house affordability calculations.

Income Requirements for House Affordability

Your annual income is the primary driver of house affordability. On a $100,000 annual income, you can typically borrow between $400,000 and $450,000, depending on the lender, current interest rates, and your existing debts. On a $150,000 income, this rises to approximately $600,000 to $675,000.

These figures assume:

Current variable interest rates between 6.0 and 6.5 percent
No other major debts such as credit cards or car loans
Stable employment with verifiable income documentation
Standard serviceability assessment based on HEM living expenses

If you have a partner or spouse, combining incomes significantly increases your house affordability. Two incomes of $80,000 each ($160,000 total) provide stronger borrowing power than one income of $160,000 due to dual-income stability.

Self-Employed Income and House Affordability

Self-employed borrowers face stricter documentation requirements. Lenders typically require two years of tax returns and financial statements to assess income stability. Your house affordability is calculated using the average of your last two years of taxable income, which can be lower than your actual cash flow if you claim significant business deductions.

Deposit Size and Impact on Borrowing

The larger your deposit, the better your house affordability outcomes. A 20 percent deposit means you avoid Lenders Mortgage Insurance (LMI), which can add $20,000 to $50,000 to your total loan cost. A 10 percent deposit triggers LMI costs, and some lenders allow deposits as low as 5 percent with even higher LMI premiums.

Deposit sources include:

Personal savings accumulated over time
First Home Super Saver Scheme (FHSSS) withdrawals up to $50,000
Genuine gifts from parents or family members (must be documented)
Equity from an existing property
Government grants such as the First Home Owner Grant (conditions apply)

Saving a larger deposit not only improves your house affordability but also demonstrates financial discipline to lenders, which can result in better interest rate offers.

Interest Rate Environment and Affordability

Current interest rates (as of 2026) sit between 6.0 and 6.5 percent for standard variable home loans. Lenders stress-test your application at 3 percent higher (9.0 to 9.5 percent) to ensure you can handle potential rate rises. This stress test significantly reduces your borrowing capacity compared to lower-rate environments.

When evaluating house affordability, consider whether to choose fixed vs variable loan rates. Fixed rates provide repayment certainty for one to five years, while variable rates offer flexibility and potential rate decreases.

Calculating Your Borrowing Power

To determine your house affordability, use a borrowing power calculator that factors in your income, deposit, existing debts, and current interest rates. Most lenders provide online calculators, but speaking with a mortgage broker vs bank representative can provide more accurate personalised estimates.

Example calculation for $120,000 annual income:

Gross monthly income: $10,000
Maximum debt serviceability (35 percent): $3,500 per month
Estimated borrowing capacity at 6.5 percent: approximately $520,000
With a $100,000 deposit: Total purchase price around $620,000

Ongoing Costs Beyond the Mortgage

House affordability extends beyond the mortgage repayment. Consider these ongoing costs:

Council rates: $1,200 to $3,000 annually depending on location
Building insurance: $800 to $2,000 annually
Maintenance and repairs: Budget 1 percent of property value annually
Strata fees: $3,000 to $8,000 annually for apartments
Utilities: Water, electricity, gas, and internet

Next Steps to Improve House Affordability

Once you know your borrowing capacity, focus on finding properties in your price range. Consider these Melbourne suburbs based on house affordability brackets:

Under $500,000: Preston, Reservoir, Coburg, Lalor
Under $750,000: Ivanhoe East, Thornbury, Alphington, Heidelberg
Under $1,000,000: Kew, Fairfield, Richmond, Hawthorn

Get pre-approved for a home loan before making an offer. Pre-approval demonstrates to sellers that you are a serious buyer with verified finances. It also helps you understand your true house affordability limits before falling in love with a property outside your budget. Review the first home buyer market outlook to understand current market conditions and opportunities.

Maximising Your House Affordability

To increase your borrowing capacity and house affordability:

Pay down existing debts, especially high-interest credit cards
Reduce credit card limits (lenders assess limits, not balances)
Increase your deposit by saving aggressively or accessing family support
Improve your credit score by paying bills on time and avoiding defaults
Consider dual-income applications if purchasing with a partner
Explore government incentives for first home buyers

Understanding house affordability empowers you to make informed property decisions that align with your financial capacity and long-term goals.

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