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The journey towards owning a home can be long and complicated, so before you jump into the market and set your heart on a property, it’s vital to know how much you can borrow. 

Here’s a guide to understanding borrowing power, how it’s calculated and how you can increase yours.  

- __Related:__ [How can I boost my borrowing power?](https://www.lendi.com.au/inspire/finance/how-can-i-boost-my-borrowing-power/)
- __Related:__ [How do rate rises reduce borrowing capacity?](https://www.lendi.com.au/inspire/property/what-rate-rises-mean-for-borrowing-capacity/)
- __Related:__ [How your debt impacts your borrowing power](https://www.lendi.com.au/inspire/finance/how-your-debt-impacts-your-borrowing-power/)

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## What is borrowing power? 

Your [borrowing power](https://www.lendi.com.au/inspire/finance/how-much-can-i-borrow/) is essentially the amount of funds a lender is likely to approve for you to borrow from them.  

Lenders base your borrowing power on the evaluation of several factors, including: 

- Income and assets 
- Credit history 
- Savings history 
- Debts 
- Typical monthly spending 
- The type of loan you want, as well as the loan term and interest rate 
- Property deposit size 
- The market value of your desired property 
- Personal characteristics such as age, job and number of applicants 

Essentially, they want to know whether you’ll be able to comfortably manage regular repayments. A mortgage is long-term, so most lenders want to steer clear of ‘risky’ borrowers.  

If you have little to no existing debt, a large deposit saved and existing assets, you’re more likely to have a higher borrowing power than someone with a lot more debt and no assets.  

It’s important to note that having a high income doesn’t necessarily guarantee a high borrowing power if your expenses are high and/or you have a poor debt-to-income ratio.  

## How much can I borrow? 
![home-auction-coins](//images.ctfassets.net/o2gysnvd04sg/1RbP0lBWXTHE8r66KuXhle/0cf633feeec2fb0e5d7e22e841e05a98/home-auction-coins.jpg)

In general, it’s usually advised not to borrow more than 80% of the property’s value when taking out a home loan. If you do borrow over 80%, it means that your deposit is lower and you’ll have a high [Loan to Value Ratio (LVR)](https://www.lendi.com.au/home-loans/lvr/).  

It’s likely that you’ll be charged [Lenders Mortgage Insurance (LMI)](https://www.lendi.com.au/home-loans/lmi/) if you purchase a home with a deposit below 20%.  

Be wary of over-inflated property sale prices. If you purchase a property for a price that significantly exceeds its market value, you could experience difficulty getting approved for a home loan or even end up in negative equity.  

At the end of the day, the amount you will be able to borrow depends on a number of factors associated with your current financial situation. These factors will influence your borrowing power. 

If you’re looking for an estimate of how much you might be able to borrow, [try out our Borrowing Power Calculator](https://www.lendi.com.au/home-loans/basics/borrowing-power/applicants/). You’ll be asked a few simple questions about your income, expenses, regular repayments and personal situation so that we can provide a more accurate estimate of your borrowing capacity.  

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## How can I increase my borrowing power? 

If you’re not satisfied with what your current borrowing capacity can get you on the property market, there are ways to increase it.  

The best ways to increase your borrowing power and chances of credit approval involve indicating to the lenders that you are financially sound and can meet your financial obligations. 

Here are some ways to boost your borrowing power: 

1. __Pay off existing debt:__ how much debt you currently have will greatly influence your borrowing power. A borrower with a lot of existing debt could struggle with taking on further debt, so lenders may be wary of this.  

  Try to pay down your existing debt as much as possible before applying for home loans. If you can’t fully pay off your other debts, once you have a home loan, you could look into [consolidating your debt](https://www.lendi.com.au/calculators/home-loans/debt-consolidation-calculator/) under your home loan so that you just make one debt repayment a month. 

2. __Get rid of unnecessary credit cards:__ many Australian lenders view credit cards as a potential debt. So, if you have a credit limit of $4,000 per month, they may view that as a $4,000 potential debt (per month!). If you don’t need your credit cards, consider cancelling them or at least reducing the credit limit.  

3. __Build your savings:__ having a good saving history signals to lenders that you will have a buffer for repayments in case your financial circumstances change in the future. At the same time, having a larger deposit saved will reduce the amount you need to borrow.  

  Lenders usually require you to have around 20% of the value of your home saved up as [deposit](https://www.lendi.com.au/home-loans/deposit/). Having a deposit of less than 20% will usually mean you will have to pay [Lenders Mortgage Insurance (LMI)](https://www.lendi.com.au/home-loans/lmi/). 

4. __Work on your credit score:__ when you apply for a home loan, the lender will look at your credit report and credit score. They want to get an idea of your reputation as a borrower and determine whether you are responsible enough to lend to.  

  Even just being aware of your credit history is important as it can tell you what you need to improve, so take advantage of the free reports you can access. Don’t forget to check for any inaccuracies in your credit history and personal details on file. Making loan and credit card repayments on time consistently can help boost your credit rating.  

5. __Your income may be more than just your salary:__ when recording details about your income in your mortgage application, remember to include things like rental income to increase your borrowing capacity.  

## What is LVR? 

[Loan to Value Ratio (LVR)](https://www.lendi.com.au/home-loans/lvr/) indicates the portion of the property’s value a person is borrowing. 

It is your loan amount divided by the value of the property, expressed as a percentage. The LVR is always the inverse of the percentage of the home loan deposit you have saved up. So, if you have a deposit of 15%, then your LVR will be 85%. 

  LVR = (Loan Amount / Value of property) x 100 

Because of its relationship with your savings deposit, having a high LVR will mean having a low deposit, which in turn will affect your borrowing power.  

Having a higher LVR means that you are borrowing a larger proportion of the price of your home than you are saving yourself and this increases the amount of risk you pose for the lender. Consequently, the lender may reject your loan application. 

Alternatively, they may be willing to lend you a lower amount or offer the loan, but with a higher interest rate. 

## What is LMI and how can I avoid paying it? 

[Lenders Mortgage Insurance (LMI)](https://www.lendi.com.au/home-loans/lmi/) is a fee charged by lenders to safeguard themselves from incurring losses if a borrower fails to meet their repayment obligations.  

Commonly it is utilised if the borrower wants to borrow more than 80% of the purchase price, and therefore does not have the full 20% deposit. LMI is calculated as a percentage of the amount borrowed. 

To avoid paying LMI, borrowers have a couple of options: 

1. __Have a 20%+ deposit:__ having the 20% deposit saved will greatly enhance your chances of approval and can indicate to your lender that you are not a very risky borrower. 

2. __Get a guarantor:__ another option is getting a guarantor for your loan, which is a person that co-signs the loan agreement with you and uses equity in their property as security. They also agree to be liable to repay on your behalf should you fail to meet your repayment obligations. Read more about guarantor home loans [here](https://www.lendi.com.au/home-loans/guarantor/). 

%%Will you need to pay LMI?%%

## How is borrowing power calculated? 
![family-at-kitchen-table-smiling-at-tablet](//images.ctfassets.net/o2gysnvd04sg/5V620QiAXJerP8MSN3uxnB/2eb7981ff18a3c6e0fd3bac724517631/family-at-kitchen-table-smiling-at-tablet.jpg)

Borrowing power is calculated differently between lenders, however, there are some basic criteria that most follow, which include: 

- __Income:__ this is the most important factor when calculating borrowing power, as your earnings can provide a lot of information on your repayment ability and cash flow. 

- __Savings and equity:__ your savings are an indicator of your potential deposit and shows your ability to handle money and expenses. If you own enough assets or have sufficient equity in your home currently, your borrowing power increases as you can use these as security/collateral. 

- __Deposit:__ your deposit is critical to your borrowing power, as if you don’t have 20% of the purchase price of the property you may be required to pay LMI. 

- __Dependants (children):__ this can affect your borrowing power as the amount spent on dependants is taken into consideration. 

Lenders will take all of this into account and evaluate your borrowing power based on various algorithms. But essentially, they subtract your expenses from your net income to determine your borrowing power.  

Noting that interest rates can fluctuate, lenders will also consider your ability to repay your loan at a higher interest rate. 

The Australian Prudential Regulation Authority (APRA) stipulate that banks must use a minimum interest rate buffer of 3% when assessing loan serviceability. So, if you’re applying for a home loan with a 4% advertised interest rate, lenders will calculate your ability to repay that loan with an interest rate of 7%.  

Use our [Borrowing Power Calculator](https://www.lendi.com.au/home-loans/basics/borrowing-power/applicants/) to find out how much you could borrow.  

## What other factors should I consider to work out my borrowing power? 

When thinking about borrowing power, many borrowers get very wrapped up in having a large enough deposit. You also need to think about the other fees that you need to set aside funds for, including: 

- [Stamp duty](https://www.lendi.com.au/home-loans/stamp-duty/) 
- Legal and conveyancing fees 
- Loan establishment fees 
- Property inspections 
- Property valuation 
- Lenders Mortgage Insurance (LMI). 

[Stamp duty](https://www.lendi.com.au/home-loans/stamp-duty/), for example, is a one-off government tax charged with the transfer of ownership of an asset. It is calculated based on the property’s location and value. Unless you are eligible for an exemption or [concession](https://www.lendi.com.au/inspire/finance/grants-concessions-first-home-buyers/), stamp duty is likely to be your largest upfront cost – besides your deposit.  

Consider saving up an extra 5-10% on top of your deposit to account for these property and home loan related fees. 

%%Calculate your stamp duty in seconds%%

## How can I qualify for a home loan? 

Some basic guidelines that are commonly considered when approving home loans include: 

- __Deposit amount:__ Generally, lenders require a minimum of 20% of the purchase price but there may be home loan product options available that allow you to provide a lower deposit. 

- __Credit history:__ A [clean credit history](https://www.lendi.com.au/inspire/finance/6-ways-to-improve-your-credit-score-quickly/) and little concerning debt is the desired goal when being assessed for a loan. Ensure your credit history is favourable and up to date with all the correct information. 

- __Income and financial stability:__ Maintaining a steady income and being able to prove your financial stability is critical. Ensure you have all the required documents to prove your financial power and declare all admissible income to qualify for your desired loan. 

- __Age:__ This is not the most pressing criteria, as there are different types of home loans for people of different ages. However, if you’re over a certain age then your repayment period can be limited. By law, in order to qualify for an Australian home loan product, you must be eighteen years of age or over. 

## What is pre-approval and how long can it last? 

It can be a smart idea to know exactly what you can afford before you go out and search for your dream home. Pre-approval does exactly that for you.  

[Getting pre-approved for a loan](https://www.lendi.com.au/home-loans/pre-approval/) means that the lender is indicating that they are likely to approve you for a specific home loan amount.  

While it isn’t unconditional approval, it can give a borrower more confidence when it comes to searching for properties, [as well as making offers and bidding at auction.  ](https://www.lendi.com.au/inspire/property/auction-vs-private-sale-how-to-buy-property-in-australia/)

For sellers looking for a fast settlement, a pre-approved borrower can be an attractive prospect as having pre-approval may mean that the borrower can sort out their finance faster.  

Pre-approval typically lasts for between 3 and 6 months but may be extended in some circumstances. These time limits exist to acknowledge that the borrower’s circumstances may change within this time. 

It’s important to understand that pre-approval does not guarantee final approval for a home loan. If your financial or personal circumstances change, or the lender changes their lending policies, it’s possible to be denied formal home loan approval.  

## What is a loan term and how long do you have to pay off your loan? 

A loan term is the period of time in which you and your lender have agreed that you will repay your loan in its entirety. Think of it as the life of your loan and it is something that is selected at the beginning of the loan, but can change with [refinancing](https://www.lendi.com.au/home-loans/refinance/).  

Most home loans come with repayment terms of up to 35 years, given that home loans are usually very significant amounts of money. 

Bear in mind that a home loan accumulates interest. The longer your repayment term, the more you’ll spend on home loan interest.  

While paying more interest isn’t ideal, a longer repayment period can sometimes boost your borrowing capacity as it lowers your monthly repayments.  

When applying for home loans, think realistically and responsibly. While lenders are unlikely to approve you for a loan they don’t think you can handle, try not to bite off more than you can chew.  

Where possible, keep your home loan repayments under 30% of your overall monthly gross income.  

If you’d like to understand your borrowing power better, [get in touch with one of our Home Loan Specialists today](https://www.lendi.com.au/book-appointment/).  

## What could your home loan repayments look like?

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## Got a home loan question? Just ask!
We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a [Home Loan Specialist here](https://www.lendi.com.au/book-appointment/). 

*The information in this post is general in nature and should not be considered personal or financial advice. 
You should always seek professional advice or assistance before making any financial decisions.*