How many times your salary you can borrow for a home loan will depend on a number of factors. Indeed, your income is one of the most critical parts of your home loan application. Not only does it establish your borrowing capacity, but it can also affect:
- The property value you can afford.
- The size of your mortgage repayments.
- Your home loan eligibility.
This is because lenders use your salary to see if you can finance your home loan over the length of your loan term. Your lender wants you to afford your mortgage, after all, so they will make sure you’re not spending too much.
So how do lenders use your income to decide what you can borrow? And if your borrowing capacity is too low, what can you do?
Check out your buying power with our buying power calculator.
What if I can service a mortgage with my salary, but I don’t have a deposit?
OwnHome allows customers to get a foot on the property ladder without hundreds of thousands of dollars upfront.
Backed by some of Australia’s most trusted financial institutions, OwnHome is working alongside the big players to help you get ahead in the game.
What is it?
With an OwnHome Deposit Boost Loan, all you need is 2% upfront, and we’ll cover the rest of your 20% deposit - so you don’t pay Lenders Mortgage Insurance (LMI)! Plus, once you're ready to start house hunting, you'll be supported by our team of expert Buyer's Agents - at no additional cost!
Here's how it works:
- Bridge your deposit gap - For just 2% upfront, we’ll cover the deposit you need to unlock your very own 80% LVR mortgage.
- Hello, pre-approval - There are no restrictions on which lenders you can pair with your OwnHome deposit.
- Find your dream home - Our qualified team of home-buying experts will help you every step of the way—from search to settlement.
- Low monthly repayments - You repay your OwnHome Deposit Boost Loan over time, just like you would with your mortgage. Consider it as paying for your deposit while you live in your home. Plus, there are no penalties for paying off your loan early.
Who is eligible?
OwnHome exists to help aspiring homeowners who need a boost to their deposit. Key requirements for a Deposit Boost Loan are:
- Credit in good standing
- Proof of employment
- Permanent residency or citizenship for at least one applicant
- Looking to buy an owner-occupier property
- Savings to cover 2% (+GST) Starter Fee
What do home loan lenders consider in your mortgage application?
There are a few main parts of your home loan application that lenders consider, whether you’re buying a first home buyer looking for a new home or a veteran merely refinancing. The most important are:
- Your annual income, including any rental income you make.
- The size of your upfront deposit.
- Your loan-to-value ratio, or LVR.
- How much you have in savings or offset accounts.
- Your living expenses.
- The number of dependents you have.
- Existing debts and liabilities.
- The type of home loan you want.
- Your credit score and credit history.
- The loan amount you need.
- Where you want to buy.
- What type of property you want to buy.
Each of these factors either establishes your borrowing capacity, home loan interest rate, or the size of your home loan repayments. They create a picture of your financial situation that your lender can use to gauge your affordability.
Consider that lenders may have different standards for investment properties and owner occupiers. Interest-only mortgages, which are typically reserved for investors, face stricter lending criteria. Low deposit home loan options may also only be available to owner-occupiers, though these usually come with the added cost of Lenders Mortgage Insurance (LMI).
How much of your salary should you spend on mortgage repayments?
Ideally, home loan lenders want you to spend no more than 30% of your monthly income on mortgage repayments. If you make $5,000 in a month, this means the maximum a lender wants you to spend is $1,500.
Keep in mind, however, that this is the maximum. In reality, spending 30% of your wage on housing is considered the threshold for mortgage stress* in Australia. Your lender only uses 30% to lay out a budget for your mortgage repayments. In a perfect world, they want you to spend much, much less.
Lenders may use your gross or net income when evaluating your home loan application. Your gross income is your overall pay, while your net income is your pay minus financial commitments like bills. Net income can give them a more accurate idea of your living expenses.
A lender will also stress test your monthly repayments by adding a 3% buffer to your interest rate, no matter if it’s a variable rate or a fixed rate. This is because your interest rate will likely change over your loan term, so if rates rise, your lender wants to know if you earn enough money to absorb the change in your mortgage repayments.
*Some property experts argue mortgage stress is spending more than 50% of your gross income on housing rather than 30% of your net income.
Based on your salary, how much money can you borrow?
You can use home loan calculators, such as OwnHome’s borrowing power calculator or a mortgage repayment calculator, to see how your financial situation impacts how much you can afford to borrow.
For borrowers hoping to refinance, these calculators can be just as helpful since you will need to qualify for your new loan even if your circumstances have changed.
If my income is high, why is my borrowing capacity low?
Your income isn’t the only thing your home loan lender looks at in your mortgage application. Lenders will also look at your financial commitments and other debts, such as credit card, car loan, or personal loan debt, and compare them with your take-home pay.
If there is too much competition for your money, your debt-to-income (DTI) ratio may be too high, and you may struggle with your monthly repayments. This can make you seem a bit risky to a lender so they will lower your borrowing capacity. A low DTI, on the other hand, indicates a good balance between debts and income.
How can you increase your home loan borrowing capacity?
If you’ve run your finances through a calculator or applied for home loan pre-approval but discovered your borrowing capacity is too low, there are a few options you can take.
Some of the main ways to improve your borrowing power include:
- Improving your credit score, either by cleaning up your credit history, paying down debts, or lowering your credit card limits. Keep new credit products to a minimum.
- Boosting your income, either by asking for a raise, working more hours, or taking on a side gig. Keep in mind self-employed Aussies will need to have an Australian Business Number (ABN). You can also access a 20% deposit with just 1-2%* upfront with an OwnHome Deposit Boost Loan.
- Reducing your financial commitments, whether it’s cutting back on living expenses, switching utility providers, or clearing debt.
Your borrowing capacity may also be low because you’re applying for the wrong type of home loan or the loan amount you need is too high. Compare all your loan options and look for cheaper property values in your postcode.
What happens if I borrow too much on a home loan?
Lenders have strict prudential standards and lending criteria to stop borrowers from taking out home loans they can’t afford. However, mistakes can happen, so here are some of the risks when you borrow too much.
- Mortgage stress. Struggling to make monthly repayments can be a great burden. Not only does it limit how much money you have in daily life, but mortgage stress can be a serious drain on your financial, mental, and physical health.
- Negative equity. If you take out a home loan with a small deposit and property values in your area fall, there’s a chance you could slide into negative equity, which means you owe more on your house than what it is worth.
- You can’t refinance. If your variable rate has risen too much, you may struggle to make your interest repayments. This can hurt your credit score and ironically make it harder to leave your home loan since lenders see you as too financially risky.
Talk to a home loan expert to understand all your options and affordability. You can find the terms and conditions of a home loan in the product disclosure statement and target market determination.
