Banks are governed by lots of laws and regulations; one, in particular, is the National Consumer Credit Protection Act (NCCP), which governs the banks to ensure they can only lend you what you can afford to repay. As the loan terms on home loans are generally between 25-30 years, the banks need to be comfortable that you can afford to repay your loan at today’s interest rates, and what they may be in the future: So generally, they will assess your serviceability, or the maximum amount you can comfortably repay, based on your total income, your living expenses and any other debts or financial obligations you might hold.
Stripping it back, the banks calculate your borrowing capacity by taking your income, subtracting any expenses, and, provided you have leftover income, they will use this figure to determine how much you can afford to repay. Again, this doesn’t mean you should go for the maximum loan amount possible, because it doesn’t factor in things like life changes (if you are planning on having kids); discretionary expenses like holidays; and other unexpected events.
To give you a bit more background, here are our top five things that the banks look at when working out how much they are willing to lend.
This one might seem pretty straightforward, but, if you’re not earning income, unfortunately, the banks are not going to lend you money – because you don’t have the capacity to pay back the loan. Income is considered as two things: Your base income, if you are working for an employer (i.e. PAYG, or pay as you go), or, the average of the past two years’ income if you are self-employed. (Some banks will consider the past 12 months’ income, but this depends on a couple of things.)
The banks will take your annual income, subtract the tax and superannuation figure to work out how much actually hits your bank account each month and use this figure. The banks care about your type of employment – if you are full-time, permanent or casual, or on probation. (Not all banks will consider giving you a loan until you’re off your probationary period: others will, depending on whether you’ve been in the same industry for a few years.)
- Discretionary income
The money you work extra hard for. This is bonus income – overtime, shift loading, meal allowances, car allowances and all the other perks of your job. But this is where it gets complicated, as different banks will have different policies on this type of income. Some of them love it, and will use 100% of the income, and others not so much. An example of this is car allowance – you might have a fully maintained company car, which is worth $20k to you in the pocket every year, but some banks won’t use it towards your income, and they still take off the expenses of owning a car, whereas others will use it to add up to $5,000 per year in extra income.
So what? $5,000 in extra income could translate to an extra $50,000 in borrowing capacity, so it can make a difference on your loan application. As an example, if you are receiving $20,000 per year in overtime, or commission income, you could potentially increase your borrowing capacity by $90,000 to $150,000, by utilising this income.
- Living expenses – base, plus discretionary
This is where those big Friday and Saturday nights out on the town might need to be reassessed. Like a lot of people, if you are earning $100 and spending $110 every week, you are living a touch outside of your means. The banks take this into account when they are assessing your loan application. They break down these expenses into base (the bare essentials like food, electricity, etc) and discretionary (entertainment, social, etc). In some cases the banks want to see your monthly budget with individual expenses taken into consideration – gym memberships, Foxtel, grocery bills, etc – and make sure you have some cash left over to make your loan repayments; so don’t be shocked if your banker or broker asks for more information on this.
Your expenses directly affect the loan, because, for example, if you were looking at buying an investment property and moved back home – swapping $300 per week in rent, for $100 per week in board – you would increase your borrowing capacity by over $150,000! Yikes!
- Other loans or debt
How many credit cards do you have? One for Virgin points, one for Qantas frequent flyers and one just because you wanted Apple Pay on your phone? It’s time to rethink, because all those lazy credit cards are going to affect how much the bank is going to loan you.
Did you know if you decreased your credit card limits by $10,000 you’d increase your borrowing capacity by around $40,000. Yeah, it can make a massive difference. What about personal loans or car loans? Did you have a holiday a few years back, still enjoying the memories but also the loan you took out to pay for it? By paying down a personal loan, which costs you $250 per month, you can increase your borrowing capacity by over $40,000.
- Ongoing obligations and changes in the future
What other ongoing obligations do you have? Like most of us, if you’ve got a HELP (or HECS) debt this can also affect your borrowing capacity. To give you an idea, if you had a HELP debt on a salary of $50,000 you would potentially be decreasing your borrowing capacity by around $20,000! So start trying to pay that thing off!
Do you have kids or are you pregnant? They can be the single most rewarding, but also single biggest factor in a reduction of your borrowing capacity. Did you know every dependant child could decrease your borrowing capacity by over $60,000? Yep, so the banks, lenders and building societies will really get into the weeds on your ongoing obligations, to make sure there isn’t anything there that could change or affect your borrowing capacity.
You are boring me; just tell me how much the banks will lend me!
Sure, no worries – but remember the following figures assume both base salaries, which do not include superannuation, and very basic living expenses, for one single adult. These numbers should only be taken in general and quite clearly are not specific to your situation. With that said, it should at least give you a pretty high-level indication on how much the banks will lend you, based on your individual income.
- $30,000 – $140,000 to $160,000
- $40,000 – $240,000 to $250,000
- $50,000 – $300,000 to $310,000
- $60,000 – $390,000 to $400,000
- $70,000 – $480,000 to $490,000
- $80,000 – $560,000 to $570,000
- $90,000 – $630,000 to $640,000
- $100,000 – $700,000 to $710,000
- $150,000 – $1,050,000 to $1,100,000
- $200,000 – $1,400,000 to $1,500,000
- $300,000 – $2,000,000 to $2,100,000
- $500,000 – $3,000,000 to $3,300,000