Applying for a home loan isn’t as simple as picking a number and hoping for approval. Lenders assess several factors to determine how much you can borrow, ensuring you can comfortably repay the loan without financial strain. Understanding these factors can help you set realistic expectations and improve your chances of securing the right loan for your situation.
Income and Employment Stability
One of the first things lenders look at is your income—how much you earn and how stable your employment is. Your salary, rental income (if applicable), and other regular earnings all contribute to your borrowing capacity.
Lenders prefer:
- Full-time employment with a stable income over casual or contract work.
- A steady job history with at least six months in your current role (or two years if self-employed).
- Additional income sources, such as bonuses, overtime, or rental earnings, as long as they are consistent.
If your income fluctuates (common for freelancers or business owners), lenders may average your earnings over a period of time to determine your eligibility.
Existing Debts and Financial Commitments
Your current debts play a major role in how much you can borrow. Lenders assess your debt-to-income ratio (DTI), which compares your total debt to your gross income.
Factors that can affect borrowing capacity include:
- Credit card limits and balances (even if you don’t use them often).
- Personal or car loans that require monthly repayments.
- Existing mortgages or investment property loans.
- Buy now, pay later services, which lenders increasingly consider as recurring financial commitments.
Reducing unnecessary debt before applying for a home loan can help improve your borrowing power.
Credit Score and History
A strong credit score signals to lenders that you’re a responsible borrower. Your credit report shows your repayment history, outstanding debts, and any past financial issues, such as defaults or bankruptcies.
To maintain a good credit score:
- Always pay bills and loan repayments on time.
- Avoid multiple loan applications in a short period (it can make you look desperate for credit).
- Keep credit card balances low relative to the limit.
A poor credit history can result in higher interest rates or loan rejection, so it’s important to check your credit report before applying.
Deposit Size and Loan-to-Value Ratio (LVR)
The amount you have saved as a deposit directly impacts your borrowing capacity. Most lenders require at least 20% of the property price to avoid Lenders Mortgage Insurance (LMI). However, some banks offer loans with as little as a 5-10% deposit, provided you meet their criteria.
Your loan-to-value ratio (LVR) is calculated as:
(Loan amount ÷ Property value) × 100
For example, if you buy a home worth $600,000 and borrow $480,000, your LVR is 80%. Lenders typically see lower LVRs as less risky, which may help secure a better interest rate.
Living Expenses and Lifestyle Spending
Lenders assess how much money you spend each month to ensure you can afford loan repayments. Your expenses include:
- Rent (if applicable).
- Groceries and dining out.
- Utility bills and insurance.
- Entertainment and subscriptions.
Cutting back on unnecessary expenses for a few months before applying for a loan can improve your borrowing capacity.
Interest Rates and Loan Terms
The amount you can borrow isn’t just about income and expenses—it also depends on the interest rate and loan term. A lower interest rate reduces your monthly repayments, allowing you to borrow more.
For example, with a 2.5% interest rate, a $500,000 loan might have repayments of $1,975 per month. If the rate rises to 5%, repayments increase to $2,685, which could lower your borrowing capacity.
Government Grants and Assistance
First-home buyers and certain eligible applicants may qualify for government assistance programs, which can impact how much they need to borrow. Some available schemes include:
- First Home Owner Grant (FHOG) – A lump sum payment for eligible first-home buyers.
- First Home Guarantee (FHBG) – Allows approved applicants to buy with just a 5% deposit without paying LMI.
- Stamp Duty Exemptions – Available in some states for first-time buyers, reducing upfront costs.
These programs can help boost affordability and reduce loan requirements.
How a Melbourne Mortgage Broker Can Help
If you’re unsure how much you can borrow or want to improve your loan application, speaking to a Melbourne mortgage broker can be a smart move. A broker can:
- Assess your financial situation and suggest ways to increase borrowing capacity.
- Compare loan options from multiple lenders to find the best deal.
- Help with paperwork and navigate complex lending requirements.
Final Thoughts
Understanding how lenders assess loan eligibility can help you prepare a strong application. Factors like income, debt levels, credit history, and deposit size all play a role in determining how much you can borrow. If you need guidance, a Melbourne mortgage broker can help you explore your options and secure the right loan for your needs.
