How to calculate your borrowing power

2 min read | 21 Jun 2022

Let’s take a look at Athena’s handy borrowing calculator and understand more about the factors that will influence your result.

One of the first questions potential homeowners usually ask themselves when starting their homeownership or property investment journey is “how much can I borrow?”. Using a reliable borrowing capacity formula can put you in good stead to understand the type of property you might be able to purchase and which suburbs or areas you should be looking in.

So, how do you calculate borrowing power? There are several different factors we take into account when calculating your loan potential. Let’s take you through them!

The type of home loan you choose to take out (and its interest rate) will impact your borrowing power. If you get lucky and find a home loan that has a low interest rate, then your minimum repayment instalments will naturally be lower than home loans with higher interest rates. Winning!

Choosing to stretch your home loan out over a longer term will mean that you can potentially borrow more, but the total amount of interest you end up paying by the end of your loan period will be higher. We’re different at Athena, because with AcceleRATES we automatically lower your loan’s interest rate based on how much you’ve paid off. We actually want to help you pay down your home loan faster.

Whether you’re borrowing money to buy a property to live in or for an investment property will also impact your borrowing power. This is because the interest rates on investment properties are usually higher than those placed on primary residences.

When answering the question “How much can I borrow”, taking a look at your income is a good place to start. Your income will impact your borrowing capacity, as it will dictate the amount you’ll be able to afford on your mortgage repayments each month.

It’s a simple equation; the higher your income, the more you’ll be able to afford to spend on your repayments, and the higher the likelihood that a lender will approve you for a larger mortgage.

Your living expenses and financial commitments are another key factor we take into account in our borrowing capacity formula. How much you spend each week on things like groceries, education, children's’ needs, memberships, and recreation will be assessed as the lender will need to know how much of your salary is left over to cover mortgage repayments.

Why not have a go at creating a realistic budget that covers your weekly expenses before using our borrowing power calculator? Hot tip: make sure the budget won’t leave you overstretched each month.

Having an excessive amount of debt may impact your borrowing power, as having a high debt to income ratio can make you a less serviceable borrower.

Types of debt that may affect your borrowing power include:

• Student debt (e.g. your HECS-HELP loan)

• Personal loans

• Credit cards

• Car loans

• Existing home loan debt

If you have a lot of debt, it could be worthwhile working on decreasing your debt-to-income ratio before applying for a home loan, as this could lead to you securing a lower interest rate. Consolidating your debt can be another smart move that may lead to lenders looking at your loan application more favourably.

Once again, the equation here is pretty simple; the bigger your deposit, the smaller your home loan will be and the less interest you’ll have to pay on it over the entire loan period.

The ideal scenario here is to save as much as possible for a deposit before buying a home. The amount of deposit varies from lender to lender depending on the home loan you take out. At Athena, a 20% deposit of the property price is required.

Some lenders on the market (access them through our Athena Select service) stretch to offering a home loan with only a 5% deposit. These home loans may have some varying requirements such as having a high income, very low debt and proof of a consistent savings plan. If you fall into this category, our Athena Select specialists may be able to help!

If you’re borrowing more than 80% of the total value of the property, you’ll need to take out Lenders’ Mortgage Insurance (LMI), which protects lenders in the eventuality that you’re not able to pay back your mortgage repayments (otherwise known as ‘defaulting’ on your loan).

For example, let’s say you purchase a property for $500,000. If the bank lends you $460,000, and you repay $40,000 but then are no longer able to make your repayments, the bank is then $420,000 out of pocket. In this case, the bank may be able to seize your house, but they might only be able to sell it for $450,000. LMI would protect the bank in this scenario, as well as covering the interest they would have expected on the loan you defaulted on.

Athena’s borrowing capacity formula makes it easier to answer the very first question on your home-owning journey—“how much can I borrow”?

With our borrowing capacity calculator, your estimated borrowing power is calculated based on stress testing the information you provide to us based on your income, debt and expenses, along with your loan purpose and our applicable interest rates. Doing it this way ensures that you’re not overstretched and could continue to repay your mortgage in a rainy-day situation.

It’s important to factor into your deposit amount that you have enough funds to cover the other upfront costs associated with buying a property, such as stamp duty and conveyancing.

Use Athena’s quick and easy borrowing power calculator today to get started on your homeownership or property investment journey. There’s nothing to lose, but a lot to gain!