6-MINUTE READ

“How much can I borrow?”

That’s usually one of the first questions you’ll ask when starting your property buying journey.

The problem is that every borrowing power calculator you try gives you wildly different answers.

Heck, even if you go directly to a bank or broker, you’ll get different answers, and the amounts can vary by as much as 200-300% especially if you’re earning in a foreign currency.

Often you’ll be left dumbfounded at how little you can borrow even though you’ve never been in better shape financially.

We’ll go into the details of this process to help you determine how much you can borrow, how to increase your borrowing power substantially, and what this means for you as you search for your dream property in Australia.

But first, why not give our mortgage calculator a go and see how much you can borrow for yourself.

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The Central Formula of Borrowing Power

The main principle behind working out your borrowing power is Net Surplus Income (NSI).

There are other key metrics used as well, such as Debt Servicing Ratio and Debt to Income ratio, but all you need to know is your NSI.

NSI is:

  • Adding your total net income, e.g. Salary, rental income – less any income tax
  • Minus your current ongoing liabilities (credit cards, loans, HECS etc.)
  • Minus your living expenses (rent, transport, food, holidays etc.)

Whatever you have leftover is the surplus income that can be used towards your new mortgage repayments.

Let’s do a quick scenario.

For example, let’s say your Gross income is AUD10,000 per month. After-tax, your net income is about $7,150 per month.

You have no credit cards or loan commitments, and your living expense is $2550 per month.

So you have about $4600 spare cash remaining each month that can be used towards new loan repayments which roughly equates to an $850,000 loan.

You can use our Mortgage Repayment Calculator to find out how much it costs per month for different loan amounts.

The Bank Factor – Here comes the pain

The bank is always going to assess your income much harsher than what you believe your monthly surplus income is.

Think of the person who is the least fun at parties – that is the bank.

Here are 7 of the most common and impactful bank factors that can have a profound effect on your borrowing capacity:

YouBank
Credit Cards / OverdraftsI have a $20,000 limit credit card but don’t use it so my credit card expense should be ZERO. If I did use it I always pay back in full.We assume the worst. You’ll max out the card and not pay it back therefore we’ll be applying a 46% interest rate p.a. On the maximum limit of the card(s) regardless of whether it’s used.
Result$0 credit card expense$9,200 yearly interest expense
New & Existing LoansI have a $500,000 mortgage with 3% interest rate on a 30 year term. With the first 5 years paying Interest Only. We calculate your repayments from when the P&I term begins, and at our Buffered assessment rate of your rate +2.5% to 3% i.e. 5.5% - 6% on a 25 year term
Result$15,000 yearly repayment$36,845 yearly repayment
Rental expenseThe rent is $600/week. I split the rent with another person. Both of us are on the lease agreement.We assume the worst. The other person won’t pay and since you’re on the lease agreement you’ll be liable for the full amount.
Result$15,600 ($300 * 52)$31,200 yearly rent expense
Living rent-freeI’m staying with family or friends. I don’t have to pay any rent.We’ll still assume a nominal boarding fee of $150/week.
Result$0$7,800 yearly boarding fee
Living expense I spend about $2500 per month on living expenses.We can see from your bank statements regular outgoings totalling $4000 per month. We also include the transactions made on credit cards as well.
Result$30,000 yearly living expense$48,000 yearly living expense
Rental incomeI receive rental income of $500/week from my investment property. I own this property jointly with my spouse who is not going to be on this new mortgage application.We will assume 20% of that goes to property manager, maintenance and other associated costs. As your spouse owns half the property, you are only entitled to 50% of the rent.
Result$26,000 in gross yearly income$10,400 in gross yearly rent income.
Salary incomeI earned HKD2,000,000 gross income this year. Paid 15% tax on income so had a net income of HKD1,700,000This one has a myriad of answers unlike the other factors listed above. Each bank will assess income differently but most commonly they will discount foreign currency income by 20% and then factor Australian income tax rates.
ResultHKD1,700,000 net salaryHKD982,500 net income

Note: These are the rules rather than the exception.

It’s not uncommon to see someone who’s earning well over AUD500,000 end up with a borrowing capacity of less than $200,000, especially Aussies on expat packages with large housing allowances and bonuses.

However, all issues can be resolved with some foresight and planning.

Now that you know how the lenders truly evaluate your borrowing capacity, it’s time to use this knowledge to your advantage.

How to increase your borrowing power 2-4x

If you’ve read the above sections, you’ll now have more technical knowledge on how borrowing power is assessed than 95% of home buyers.

Below we go over 3 of the easiest ways to increase your borrowing power that anyone can do.

1. Credit cards

Even if you don’t use them, they will have a significant negative impact on your borrowing capacity.

Check which ones you want to keep and cancel the rest.

With the ones, you’re keeping, reduce the credit limit, the lower, the better.

For example, if you have a $50,000 limit credit card but only ever spend up to $10,000 on any given month. Reduce the limit to $15,000 or less.

2. Living expenses

The banks in Australia all use what is known as Household Expenditure Measure (HEM) as a benchmark to estimate your living expenses.

When calculating how much you can borrow, the bank will use the higher of your stated monthly living expense or HEM.

Your living expenseHEM living expenseBank will use
$2,500$3,000$3,000
$3,500$3,000$3,500

If your current living expense is higher than the HEM, then you can consider creating a budget plan to reduce your monthly living expense.

HEM is a figure that’s based on your household income, location, and size of your family.

3. Choosing the right lender

This is especially true if you are an Australian expat or foreign national who is earning foreign currency as a non-tax resident of Australia.

Australia has over 50 lenders of mortgage products, and each lender will calculate your income differently.

The vast majority of lenders won’t consider the foreign income at all and the ones that do will typically discount your income by 20% (and as much as 40%). Further discounting can then apply to your non-base salary such as housing allowance, bonus etc.

With the remaining income, most lenders will usually tax your income at the Australian tax rates. If you are residing in Hong Kong, Singapore, UAE or other low tax jurisdictions, then this will seem unjust.

To top this off, lending policies are regularly changing, and where bank A had the most favourable policies for expats, in a year’s time bank A may no longer be lending, and bank B is now the better bank.

Take the guesswork out of choosing the right lender.

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Lastly, the most obvious way to borrow more is to earn more money! But this isn’t usually something that can be enacted in the short-term, so we’ll be leaving this out for now.

Alright! Let’s do a scenario on your borrowing power to see how we can QUADRUPLE it.

Scenario 1: Base

You proceed with the standard bank which discounts foreign base income by 20%, and a further 20% on bonus, allowances. Bank then applies Australian income tax rates to calculate your net income.

This is your financial position vs what bank will use to determine borrowing capacity:

Your detailsTypical Bank use
Base salaryHK$100,000 per monthHK$80,000
AllowanceHK$30,000 per month housing allowance which pays for rentHK$19,200
BonusHK$150,000HK$96,000
Credit cardsAU$50,000 limitAU$50,000
Living expenseAU$3,500 per monthAU$3,500 per month
Existing mortgageAU$500,000 on 3% Interest Only repayment for 5 years on 30 year termAU$500,000 on 5.5% P&I over 25 years
Income tax rate14.5%40.2%
RESULTYour maximum borrowing capacity is approximately AU$450,000

Scenario 2: Enhanced

You proceed with an expat-friendly bank which allows 100% of foreign base income. However, they still discount 20% on bonus, allowances. Also applies Australian income tax rates.

You reduce your credit card limit to $15,000 and switch your existing home loan to P&I repayments instead of Interest Only.

You also reduce your monthly living expenses to $2,500

This is your financial position vs what bank will use to determine borrowing capacity:

Your detailsTypical Bank use
Base salaryHK$100,000 per monthHK$100,000
AllowanceHK$30,000 per month housing allowance which pays for rentHK$24,000
BonusHK$150,000HK$120,000
Credit cardsAU$15,000 limitAU$15,000
Living expenseAU$2,500 per monthAU$3,000 per month (because bank uses a minimum benchmark)
Existing mortgageAU$500,000 on 3% P&I repayment on a 30 year termAU$500,000 on 5.5% P&I over 30 years
Income tax rate14.5%15%
RESULTYour maximum borrowing capacity is approximately AU$1,800,000

The two examples above demonstrate how you could potentially increase your borrowing capacity 4x with some carefully considered adjustments.

To massively increase your borrowing capacity. Start by getting expert advice, then select the best lender specific to your circumstance, understand that bank’s credit policies, and finally prepare your application in a way that maximises its strengths.

Summary: Deciding how much you can borrow vs how much you should borrow

Ultimately, how much you can borrow depends on your financial situation and choosing the right lender. How much you should borrow, on the other hand, is a different story.

We’ve given you a primer on how to substantially increase your borrowing power which does come with its risks as you’ll now be able to borrow a lot more than anticipated for your dream property.

But deciding how much you should borrow requires a more comprehensive decision than just how much money you want to spend on mortgage payments each month.

Assess your full financial situation, your ability to pay off a mortgage and where you need to save for other things such as emergencies.

Once you’ve done all that, go after that perfect home. Odin Mortgage is here to help you every step of the way.

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