Thinking of buying property in Sydney or a holiday home abroad but don’t know how much you can actually borrow? Your borrowing capacity – essentially the amount a lender might lend you – is made up of a mix of factors.
Lenders assess your whole financial picture, which includes:
- Your income
- Existing debts
- Any expected rental income
- Your deposit size (which affects the loan-to-value ratio, or LVR)
You’ll have a much clearer idea of what a bank is realistically going to offer you if you know how these pieces overlap. While the same basic principles apply for a property in Australia as they would overseas, buying internationally can introduce a few extra considerations (which we’ll touch on below).
Income and Ongoing Commitments
Income is naturally one of the main things that make up your borrowing power. Australian lenders are going to look over your salary and other earnings (like overtime or bonuses) to gauge how much money you actually have coming in.
So generally, the steadier and more regular your income, the more comfortable the bank is going to be with lending you money. If you’re self-employed or juggling multiple jobs, they might look a bit closer or use an average, but they will definitely still count various income streams in your favour.
Outgoing Expenses
They also check what you’re already paying out each month. All existing loans and other debts you’ve got are going to chip away at the portion of your income you could be using for a new mortgage. For example, even if you pay off your credit card every month, the card’s limit (say $10,000) is treated as potential debt – the bank is going to factor in a monthly repayment on that limit when calculating your expenses.
But then you’ve got everyday living costs that they factor in on top of your debts – everything from groceries to utilities – and even how many dependents you support. The more expenses and obligations you have, the less wiggle room in your budget for additional loan repayments.
So to put all this simply, every dollar you’ve already got committed somewhere else is a dollar less available for a new property loan, which is why paying down debt can boost your borrowing capacity (it frees up cash flow that lenders can then take advantage of for your next loan).
And remember, borrowing power is not identical across all banks – each lender has its own formula and criteria, so your maximum loan can differ significantly from one to another.
Rental Income from the Investment
Naturally, one of the main perks of an investment property is that it can produce rental income – and lenders will include that in your assessable income (but not at 100%).
As a general rule, about 75-80% of the gross rent is counted. So if you plan to charge $500 a week in rent, the bank might only factor in roughly $400 of it for your borrowing capacity. The rest is left out as a buffer for things like agent fees or periods when the property might be vacant, which is obviously still a possibility.
Rental income does improve your borrowing power, just not dollar-for-dollar. And if you already own other investment properties, their rental income (minus that same buffer) and their loan repayments will also be considered.
In short, lenders add up all your income sources – including rent – and weigh them against your outgoings to decide what you can comfortably afford to borrow.
Deposit Size and Loan-to-Value Ratio (LVR)
How much you can borrow also hinges on your deposit. If you’re reading this article from an investor’s perspective, remember that you will generally need at least a 10% deposit for a home loan. The bigger your deposit, the lower your loan-to-value ratio. And the more comfortable lenders will be.
If you have less than 20%, it’s often still doable, but you are probably going to have to pay Lender’s Mortgage Insurance (LMI). LMI is a one-off insurance fee that covers the lender if you default, and it usually applies when you borrow more than 80% of the property’s value. Staying at or below an 80% LVR (i.e. 20% deposit or more) lets you avoid that extra cost and can make your loan application stronger.
For example, on a $500,000 purchase, a 10% deposit (around $50,000) might come with a hefty additional LMI premium, whereas a 20% deposit ($100,000) avoids LMI entirely and puts you in a stronger position with the lender.
Your deposit can come from savings or even equity in an existing property. You’ll see loads of investors using equity from their current home as the deposit for their next purchase. It’s essentially borrowing against the home they already own to help buy the new property.
This can be a smart way to get into another investment sooner, but remember it effectively increases the loans you have (your first home loan grows), which the bank will factor into your overall borrowing capacity.
Local Investments vs Overseas Properties
If you plan on investing abroad, the lending game changes a bit. Australian banks usually won’t accept an overseas property as collateral because they cannot easily manage a foreign asset if you somehow default. You could, however, use any of the property you own here to finance a purchase over there as a bit of a workaround.
For example, you might refinance or get a home equity loan on your Australian house, then use those funds to buy the overseas property. If you do this, your borrowing capacity is still determined by your Aussie financials, since it’s your local property and income securing the debt.
Overseas Properties
Alternatively, you might seek a mortgage from a lender in the country where you’re buying, or use an international bank that caters to cross-border buyers. Some global banks (like HSBC) operate in multiple countries and may lend to Australians for overseas purchases.
These foreign loans will still examine your income and debts, much like an Australian loan, but just keep in mind that you might face different terms. Often non-resident buyers need a larger deposit when buying abroad (sometimes more than 20%), and local rules can affect how much you can borrow.
No matter where you buy, you’ll need to show that you can comfortably service the loan with your income and assets. The reality is that it’s going to take a bit more effort to finance an overseas property, but plenty of Australians do it successfully with the right planning and lender support.
How Upscore Can Help
Upscore’s Finance Passport lets you get in contact with local lenders when you’re buying property overseas. You’ll also be able to compare different loan offers and don’t have to pay a thing – we earn our fees from lenders, so it’s at no cost to you.
