How much can I borrow for a home loan?

The short answer

A lender takes your assessable income, subtracts your existing debt repayments and your assessed living costs, and works out what is left over each month. It then asks how large a loan that surplus could service at an assessment rate set well above the advertised rate.

That surplus is the whole game. Two people on identical salaries can have borrowing figures hundreds of thousands of dollars apart because one has a car loan and an unused credit card and the other does not.

What a lender actually counts as income

Base salary from permanent employment is the easy part. Almost every lender takes it in full, subject to seeing recent payslips and, often, a year-to-date figure that matches them.

Everything beyond base salary is where lenders start to differ. Overtime, bonuses, commission and allowances are frequently shaded, and the proportion counted varies from one credit policy to the next.

The income types that cause the most variation

• Overtime, which some lenders take in full for essential-service workers and heavily discount for everyone else
• Bonus and commission, usually averaged over two years, and sometimes discounted on top of that
• Self-employed income, taken from tax returns and company financials, with added-back items treated inconsistently
• Rental income from an investment property, discounted to allow for vacancy and costs
• Casual and contract income, where length of service in the role matters as much as the amount
• Family tax benefits and similar payments, accepted by some lenders and disregarded by others

If most of your income sits in one of those categories, lender choice matters more for you than it does for a salaried buyer. Picking the wrong one first can cost you a credit enquiry and a great deal of time.

How your debts and living costs cut the number

Existing repayments come off your income before anything else. Car finance, personal loans, buy-now-pay-later accounts and student debt all reduce what is left to service a mortgage.

Credit cards are the one that catches people out. A lender assesses a card on its limit, not on the balance, so an unused card with a high limit reduces your borrowing power exactly as much as a maxed-out one.

Living costs and the benchmark floor

You will be asked to declare your household living costs. The lender compares what you declare against a benchmark measure for a household of your size and income, and uses whichever is higher.

That means declaring an implausibly low figure gains you nothing, because the floor applies anyway. It also means genuinely high spending in your recent bank statements can be used against you, so the months before an application are not the time to go unusually hard on discretionary spending.

Dependants matter here too. Each child raises the benchmark, and childcare costs are assessed on top of it.

The stress test, and why your number is not based on the advertised rate

Lenders do not assess your capacity to repay at the rate you would actually be charged. They add a buffer and assess you at the higher figure, so that a rise in rates does not immediately put you in trouble.

The buffer is a regulatory expectation rather than a marketing decision, and individual lenders apply their own assessment floors on top of it. This single mechanic is the reason your borrowing figure feels low relative to the repayments you know you could manage.

It also means falls in the advertised rate move your borrowing power less than people expect. The buffer moves with the rate, so the gap between the two does most of the work.

Deposit, loan to value ratio and mortgage insurance

Servicing tells a lender whether you could repay the loan. The deposit tells it how much risk it is carrying if you cannot, and the two are assessed separately.

Your loan to value ratio is the loan divided by the property value. The higher it is, the more likely lenders mortgage insurance applies, and the more restrictive the credit policy becomes.

What people forget to budget for

• Transfer duty, which in Western Australia is assessed by RevenueWA and depends on the property value
• Settlement agent or conveyancer fees
• Lender application, valuation and settlement fees, where they apply
• Lenders mortgage insurance, if your deposit sits below the lender's threshold
• Building and pest inspections before you commit
• Moving costs, connections and the immediate work every house seems to need

Guarantor arrangements and the various government support measures can change the deposit picture considerably. Whether any of them apply to you depends on your circumstances, and they are worth asking about before you settle on a savings target.

Why two lenders give you two different numbers

Every lender writes its own credit policy. Two of them can look at the same payslips, the same statements and the same property, and arrive at figures a long way apart.

This is the substantive argument for using a broker rather than walking into one branch. Your bank can only ever offer you your bank's policy, and if that policy happens to treat your main income type harshly, you will never find out what a different lender would have said.

How to move the number in your favour

Most of the levers are unglamorous, and most of them work faster than waiting for a pay rise. The list below is roughly in order of impact for a typical borrower.

• Close credit card accounts you do not use, and reduce the limits on the ones you keep
• Clear small consumer debts and buy-now-pay-later accounts entirely, rather than part way
• Keep your bank statements clean and explainable for several months before applying
• Avoid new credit applications, each of which leaves a mark on your file
• Get your tax returns and financials up to date if you are self-employed
• Have a clear, documented explanation for any large or irregular deposits into your accounts

Then get a real assessment rather than a calculator estimate. A broker can run your position against several lenders' policies before anything is submitted, which costs you nothing and does not touch your credit file.

Any figure you are given is subject to lender approval, a valuation of the property you choose, and your circumstances staying broadly as they are. It is a working number, not a promise, and it should be treated as one.