Getting approved for a home loan starts with understanding your borrowing power. Whether you’re a first home buyer or looking to upgrade, knowing how much you can borrow helps you set realistic property goals and shop with confidence. Your borrowing capacity isn’t just about your income: lenders consider multiple factors to determine the maximum loan amount they’re willing to offer. This comprehensive guide breaks down everything that influences your borrowing power and shows you practical ways to maximise it.
Understanding Loan-to-Value Ratios
The loan-to-value ratio (LVR) is one of the most important concepts in home lending. It represents the percentage of your property’s value that you’re borrowing.
How LVR works:
- If you buy a $800,000 property with a $640,000 loan, your LVR is 80%
- The remaining 20% ($160,000) is your deposit
- Most lenders prefer LVRs of 80% or below
Lower LVRs typically mean:
- Better interest rates
- More loan options
- Reduced risk for lenders
- No lenders mortgage insurance required
Higher LVRs (above 80%) often trigger additional costs like lenders mortgage insurance, but they make homeownership accessible with smaller deposits.
The Importance of Having a Deposit
Your deposit plays a crucial role in determining both your borrowing capacity and loan terms. While it doesn’t directly increase how much you can borrow based on income, a larger deposit opens up more property options.
Lenders Mortgage Insurance (LMI)
When your deposit is less than 20% of the property value, most lenders require LMI. This insurance protects the lender (not you, unfortunately) if you can’t meet your repayments.
LMI costs vary based on:
- Your LVR
- Loan amount
- Lender policies
The good news? LMI can often be added to your loan amount, so you don’t need to pay it upfront.
Australian Deposit Guarantee Scheme
From October 2024, eligible first home buyers can secure a loan with just a 5% deposit through the Australian Deposit Guarantee Scheme, while avoiding LMI. This government initiative helps more Australians enter the property market sooner.
Key features:
- Available to first home buyers
- Minimum 5% of genuine savings required; 2% for single parents/guardians in some circumstances
- No LMI payable
- Income and property price caps apply
- Limited places available annually
How to Improve Your Borrowing Position
Boosting your borrowing power often comes down to improving your financial profile. Here are practical strategies that can make a real difference:
Reduce Existing Debts
Outstanding debts directly impact your borrowing capacity, as lenders assess your ability to manage future repayments alongside current financial commitments. Even unused credit card limits count against you because they represent potential debt you could take on at any time.
Action steps:
• Pay down personal loans and credit cards: Reducing your existing balances can immediately improve your borrowing power. Start with debts carrying the highest interest rates.
• Close unused credit cards or reduce limits: Every unused card adds to your total available credit. Lowering your limits or closing unnecessary accounts helps your debt-to-income ratio.
• Consolidate high-interest debts where possible: Combining multiple debts into one lower-rate loan can simplify repayments and free up cash flow—an attractive sign of responsible money management for lenders.
• Avoid new debts before applying: Taking out new finance just before applying for a home loan can signal financial instability. Keep your credit profile steady in the months leading to your application.
Demonstrate Consistent Savings
Lenders look for evidence that you can not only save but also maintain financial discipline over time. A reliable savings pattern demonstrates your ability to budget, live within your means, and manage future mortgage repayments responsibly.
What lenders look for:
• Regular deposits over 3+ months: Consistency is key: steady, predictable contributions into a savings account are far more impressive than one-off lump sums.
• Genuine savings (not gifts or windfalls): Funds that come from your own income, rather than one-off bonuses or family gifts, show stronger financial reliability.
• Minimal “dishonour” fees or overdrafts: Lenders check your bank statements for signs of good money management. Avoid missed payments, overdrafts, or dishonour fees, which can raise red flags.
• Evidence of saving towards a goal: Demonstrating a clear purpose, such as building a home deposit,helps reinforce your commitment and financial planning skills.
Improve Your Credit Score
Your credit score plays a major role in determining not just whether your loan is approved, but also the interest rate and terms you’ll be offered. A higher score can lead to thousands of dollars in savings over the life of your loan.
Quick wins for better credit:
• Pay all bills on time: Set up direct debits or reminders to ensure no late payments appear on your record. Even small oversights can negatively impact your score.
• Check your credit report for errors: Request a free copy of your report from a major credit bureau and dispute any incorrect listings.
• Avoid multiple loan applications in quick succession: Each application leaves a mark on your file. Too many in a short period can signal financial stress.
• Keep credit card balances low: Aim to use less than 30% of your available limit to show lenders you manage credit responsibly.
• Maintain older accounts: A longer credit history can strengthen your score, as it shows stability and consistent management.
Choose the Right Lender
No two lenders assess your situation in exactly the same way. Policies vary widely, and what’s a deal-breaker for one lender may be perfectly acceptable to another. Choosing the right lender for your circumstances can make a significant difference to both your approval chances and the total cost of your loan.
Lender variations include:
• Treatment of overtime, bonuses, or commission: Some lenders count a higher percentage of variable income than others.
• Assessment of casual or contract employment: Policies differ on how much income stability is required for non-permanent roles.
• Debt-to-income ratio limits: Lenders have varying thresholds for how much debt they’ll allow relative to your income.
• Interest rate buffers applied: Each lender adds a buffer to your loan interest rate when testing affordability. A smaller buffer can increase your borrowing capacity.
• Specialised lending policies: Certain lenders offer tailored options for first-home buyers, self-employed applicants, or borrowers with past credit issues.
Median Home Loan Statistics
Understanding current market trends helps set realistic expectations for your borrowing journey.
| Loan Type | Average Amount |
| First home buyer loan | $554,961 |
| Refinance loan | $582,137 |
| Investment property loan | $674,259 |
| State/Territory | Average Home Loan |
| New South Wales | $815,865 |
| Victoria | $639,250 |
| Queensland | $661,590 |
| Western Australia | $620,123 |
| South Australia | $597,006 |
| Tasmania | $481,293 |
| Northern Territory | $484,274 |
| ACT | $635,460 |
Source: ABS
These figures reflect the significant regional variations in property prices and borrowing patterns across Australia.
Avoiding Common Home Loan Borrowing Pitfalls
When applying for a loan, it’s important to avoid some common mistakes that can lead to financial or administrative challenges. One key mistake is borrowing more than you need, which can result in unnecessary debt and higher repayment burdens.
Carefully calculate the exact amount required to meet your needs, which you can do right here at LoanCalculator.com.au.
Another common oversight is failing to review and understand hidden fees, such as processing charges or penalties, which can significantly increase the overall cost of the loan.
Proper documentation is also crucial, submitting incomplete or inaccurate paperwork can cause delays or even result in your application being denied. Lastly, it’s essential to pay close attention to repayment terms, as missing payments not only impacts your credit score but can also damage your reputation.
By addressing these potential pitfalls, you can ensure a smoother and more successful home loan application process.
Take Control of Your Property Journey
Knowing your borrowing power is the crux of a successful property purchase. Knowing the specifics of how much you can borrow will empower you to attack the market with confidence and prevent you from getting disappointed by targeting properties outside your budget.
Keep in mind that borrowing capacity does vary based on interest rates, your financial position, and lender policies. Regular updates keep this information current so you’re never working on outdated information. Begin by assessing how much you can borrow today, then explore loan options that match your needs and goals. With the right preparation and expert guidance, your property dreams are well within reach.
