As a rough rule of thumb, you don't want to spend more than 30% of your income on mortgage repayments. So a very quick way to work out what you can afford to borrow is to: Take your annual income. Work out 30% of that figure.
Your income is a major determining factor in your borrowing capacity, it is important to do your sums on your monthly income and plan your home loan on how much you can realistically afford. The general rule of thumb is not to let your repayments exceed more than 30% of your after-tax salary.
Generally speaking, your borrowing power is calculated as your net income minus your expenses. Your expenses can be impacted by things like the number of dependents in your family, any current home or personal loan repayments and other financial commitments such as private health insurance.
A $70,000 annual gross income with a mortgage at 5.99% p.a. equates to a loan amount of up to $391,222. With a 10% deposit contribution, the maximum affordable property price would be $434,691, or with a 20% deposit $489,027.
“To comfortably afford this you'd need to be earning a minimum income of just over $180,000 – significantly more than the average salary.”
Potential homeowners who have a $50,000 home loan deposit prepared have the potential to borrow up to $250,000 depending on the individual mortgage broker or lending specialist. Generally, lenders will require a 20% deposit for a home loan, however, this does vary.
Lenders traditionally offer an amount between four and five times your income, though in some cases they may offer more or less than this. If you are borrowing with a partner there are a few ways a lender might combine your incomes.
Most lenders will use your annual salary to assess your affordability. Some lenders will also include bonuses and overtime and may allow income from a pension, child maintenance and income investments, such as buy to let.
The 30% rule: One of the key guidelines that many lenders use when determining how much you can borrow on a home loan is the 30% rule. This rule states that your monthly mortgage repayments should not exceed 30% of your gross income.
In order to be able to comfortably afford the mortgage repayments on a million-dollar home, you will probably need to make around $160,000. However, if you only make $160,000, you will need to find a lender who multiplies your salary by a factor of 6.25 when assessing your borrowing power.
If you make $70,000 a year living in Australia, you will be taxed $14,617. That means that your net pay will be $55,383 per year, or $4,615 per month. Your average tax rate is 20.9% and your marginal tax rate is 34.5%. This marginal tax rate means that your immediate additional income will be taxed at this rate.
Your income & commitments:
Before a lender will give you a home loan, they will want to assess how much you can afford in mortgage repayments. To determine exactly how much you can afford in mortgage repayments, they will look at your income as well as any outstanding debts and other commitments you have.
Yes, your savings can affect your borrowing capacity. Lenders want to see evidence of 'genuine savings'. This refers to money that you've saved over an extended period of time. It indicates positive financial habits and presents you as a lower risk borrower.
Lenders are not allowed to discriminate based on age, but they still need to make sure you satisfy the usual lending criteria. This is based on your capacity to make timely repayments over the life of your loan.
To afford a $300,000 mortgage, you need to make between $50,000 and $75,000 a year.
A potential borrower in Australia who is interested in purchasing a home that costs $400k will need to make a yearly salary of $66,000 through $100,000 depending on the individual mortgage broker or lending establishment.
The average monthly repayment amount is $2,000, so in this example, we're going to list $1,000 in the expenses column. An annual after-tax $80,000 income with $1,000 in monthly expenses nets you a mortgage of just under one million. With an interest rate of 4% over 30 years, you'll see a monthly repayment of $4,800.
From November 2021, borrowers will need to be able to prove they can make repayments at least 3% higher than their actual loan rate, in order to receive a loan. This is a form of “stress testing” to make sure you can afford your mortgage repayments, if and when interest rates rise.
Having a higher deposit gives you access to lower interest rates and means you borrow less overall.
What effect do higher interest rates have on borrowing? Higher interest rates essentially mean that your borrowing power will reduce. A higher interest rate increases the cost of repayments for you and lenders want to ensure that they are lending to those who can handle higher rates.
This means if you're looking to buy a house with a value of $800,000, you'll need a deposit somewhere between $40,000 and $80,000. Read: The key to home ownership: know your borrowing power.
In total, you will need 8-10% of the purchase price in savings to afford a home. So for example, if you were buying a place for $400,000 you would need around 10% or $40,000 in savings. This includes the bank (sometimes called the home loan deposit) and other costs like stamp duty.
As a guide, it's best if your repayments don't exceed 30% of your after-tax salary. Use our calculators to get a good idea of what your repayments will be once you start making mortgage repayments on your new loan. If you're self-employed, you may not have a regular income or payslips.