How much can I borrow?
How much you can borrow, on either a home loan or a personal loan, depends on:
- Your total household income,
- Total household expenses,
- The value of your security,
- Your other debts,
- Your credit rating
- The loan rates, fees and loan period.
While all these factors are part of working out how much you can borrow, the main issues are your income and expenses. While the value of the security (like your home, or your car in the case of a car loan) is a factor, your ability to repay the loan without hardship is the number one issue for lenders.
What is my income?
For the purposes of applying for a loan, you want to maximise your income. You might be used to minimising your income by making deductions and claiming rebates but when it comes to applying for a loan, you need to maximise your income.
Your income is not just your ‘taxable income’ which the Tax Office says comprises of:
- salary and wages
- interest from bank accounts
- dividends and other income from investments
- bonuses and overtime
- commission a salesperson receives
- government payments such as the age pension, Newstart allowance and youth allowance
- rent paid to you.
What are my living expenses?
Your actual income includes all these things plus any non-taxable income streams such as allocated pensions, some other Centrelink pensions and some education payments.
Lenders will ask you to estimate your living expenses and they will also use other tools when assessing your loan application. Most banks:
- use the Household Expenditure Method (HEM) to assess household expenses.
- will also ask you to self-assess your own living expenses.
- will ask for bank account statements to back up your self-assessment.
When you self assess your expenses for a loan application, you will be asked to list your:
- Rent, board or mortgage repayments + rates and all other housing costs
- Clothing and personal care expenses
- School, childcare and education costs
- Food and groceries
- Insurance bills
- Investment expenses
- Car and Transport
- Utility bills
- Medical and health expenses
- Entertainment, sport, leisure
- Other ongoing expenses
You can use the InfoChoice budget planner calculator to plan your expenses and savings.
How much can I borrow on a home loan?
How banks and other lenders assess the expenses of loan applicants has recently been the subject of court proceedings between Westpac and ASIC.
The Australian Securities and Investment Commission says lenders like Westpac have been using a very low household expenses measure – the basic HEM level – to approve loans for borrowers that self-assessed their expenses at much higher levels.
Some consumer lobby groups assert that Westpac and other lenders are approving loans based on under-estimated expenses and are therefore setting borrowers up to fail. However, Justice Nye in the Federal Court disagreed and ruled in favour of Westpac, a decision that is being appealed by ASIC to the full Federal Court.
“The court finding was incredibly disappointing,” said Karen Cox, CEO of the Financial Rights Legal Centre.
“The decision suggests that banks do not have to have regard to people’s actual expenses when they lend.
“Which in turn will allow lenders to continue to extend unsustainable loans which set people up to fail.”
To find out how much you can borrow on a home loan, you can use the InfoChoice Borrowing Power Calculator.
You will need to enter the loan interest rate, the loan period, all your income and your other debt expenses.
How much can I borrow on a personal loan?
To find out how much you can borrow on a personal loan and how much you can afford to repay, you can use the InfoChoice Personal Loan Calculator. The InfoChoice Personal Loan Calculator helps you work out the repayments on a personal loan and the total cost over time.
The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements
InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible.
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