If you’re thinking about buying your first home, one of the first questions you’ll probably ask is, “How much can I borrow?”
The answer comes down to your borrowing capacity.
Understanding your borrowing capacity is an important first step in the home buying journey because it helps you understand what price range you may be able to afford and which homes could be within reach.
For many Perth first home buyers, borrowing capacity can have a bigger impact on their home buying plans than the size of their deposit alone.
What is borrowing capacity?
Borrowing capacity is the amount of money a lender may be willing to lend you based on your financial circumstances.
Lenders assess a range of factors to determine how much you can comfortably afford to repay while meeting your other financial commitments.
Your borrowing capacity helps establish your budget and can provide a clearer picture of the types of homes you may be able to purchase.
What factors affect borrowing capacity?
Every lender uses its own assessment criteria, but there are several key factors that commonly influence borrowing capacity.
This can include:
- Salary and wages
- Overtime
- Bonuses
- Commissions
- Rental income
- Certain government payments
Lenders generally want to see that your income is stable and sufficient to support your loan repayments.
Living expenses
Lenders will review your regular expenses to understand how much of your income is available to service a home loan.
This may include:
- Groceries
- Utilities
- Transport costs
- Insurance
- Childcare expenses
- Entertainment and discretionary spending
In many cases, reducing unnecessary expenses may improve your borrowing position.
Existing debts
Any current debts will generally reduce your borrowing capacity.
These may include:
- Personal loans
- Car loans
- Credit cards
- Buy now, pay later accounts
- Existing mortgages
Even unused credit card limits can affect your borrowing capacity because lenders assess the potential debt available to you.
Employment history
Lenders typically prefer borrowers who have a stable employment history.
Whether you’re employed full-time, part-time, casually or self-employed, lenders will generally assess the consistency and reliability of your income.
Deposit size
While your deposit doesn’t directly determine how much you can borrow, it can influence the types of loans available to you and the amount you’ll need to finance.
A larger deposit may provide greater flexibility and reduce the amount you need to borrow.
How do lenders calculate borrowing capacity?
When assessing a home loan application, lenders compare your income against your expenses and existing financial commitments.
They also apply interest rate buffers and servicing assessments to ensure you can continue making repayments if interest rates increase in the future.
This means the amount a lender is willing to lend may be lower than you initially expect.
Because every lender has different assessment criteria, borrowing capacity can vary from one lender to another.
Why is borrowing capacity important for first home buyers?
Understanding your borrowing capacity early can help you:
- Set a realistic property budget
- Narrow your property search
- Understand how much deposit you may need
- Identify suitable finance options
- Avoid disappointment later in the buying process
Many first home buyers start looking at homes before understanding their borrowing power, which can lead to unrealistic expectations and wasted time.
Can you increase your borrowing capacity?
In some cases, yes.
Steps that may help improve your borrowing capacity include:
- Reducing existing debts
- Paying down credit card limits
- Increasing your savings
- Reducing discretionary spending
- Improving your credit history
- Increasing your income where possible
Even small changes can sometimes make a noticeable difference to your borrowing position.
What does borrowing capacity mean when building a home?
If you’re considering a house and land package, understanding your borrowing capacity is especially important.
It helps determine:
- How much land you can afford
- The type of home design that may suit your budget
- What loan options may be available
- Whether you may qualify for grants an incentives
Many first home buyers in Perth use their borrowing capacity as the starting point when exploring house and land packages in suburbs such as Byford, Alkimos, Eglinton and Ellenbrook.
Taking the next step towards home ownership?
Your borrowing capacity is one of the most important pieces of information you’ll need when buying your first home.
While online calculators can provide a useful estimate, speaking with a finance specialist can give you a more accurate understanding of your borrowing power and the options available to you.
Knowing how much you can borrow can help you move forward with confidence and start planning your path towards home ownership.