There are two factors we look at when calculating the maximum purchasing price for buying a home. Customers are assessed on:

  • Their income and expenses to see how much they can afford (serviceability)
  • Their deposit and how that translates into a purchase price.

Let’s say your serviceability says you can borrow one million dollars but your deposit dictates that you can only borrow a loan of 500 thousand dollars for a property. We have to find the balance between the two calculations.

How to determine the purchase price from your deposit

When buying a house you need to consider your deposit, plus stamp duty, and other purchasing costs.

We usually estimate 5% of the purchase price to cover your expenses. Therefore, you usually need a deposit of 5% of the purchase price as well.

We then say that 10% of the purchase price, which is made up of the 5% deposit plus the 5% purchase expenses, is generally what you will need to get a loan approve.

Whatever that 10% equals divide it by 10% (0.1), and that translates to what the purchase price will be.

For example, if we had saved $30, 000 we would say that half of that would be our deposit (5% of the purchase price) and the other half would cover the purchase expenses (again 5% of the purchase price). So the $30, 000 makes up 10% of our maximum purchase price. So in order to find out our maximum purchase price we then divide $30, 000 by 10% (0.1). This would mean that the maximum purchasing price, as determined by our deposit, is $300,000.

Another example is if we wanted to have deposit of 20% so we don’t have to pay LMI. We still have $30000 in savings. So now $30, 000 would be 25% of the purchase price (20% for the deposit plus 5% for purchase expenses). So in order to find our maximum purchase price for buying a home we would then divide $30, 000 by 25% (0.25). This would mean that the maximum purchase price would be $120,000.

If you want to further increase your purchasing capacity, contact one of our knowledgeable mortgage brokers. We can find the right home loan for you. Call us on 1300 889 743 or enquire online.

Use grants to boost your savings!

If you are eligible for a grant or concession, such as not paying stamp duty, then you may not have to cover the 5% for purchase costs. Using our first example, you might only need the 5% deposit, instead of the full 10% for everything.

Grants are something that needs to be factored in. They can significantly increase the maximum purchasing price for buying a home.

We can apply for a grant on a customer’s behalf and have that available on settlement of the home loan. This can be used towards the purchase of the property as well.

To find out what grants could be available to you, call one of our expert mortgage brokers on 1300 889 743, or make an enquiry online.

Be aware that borrowing power is tougher for investors

Over the past couple of years, the Australian Prudential Regulation Authority (APRA) has required lenders to tighten their lending to investors.

In the past, your serviceability was assessed at the actual repayments you would pay every fortnight or month.

For example, for a $100,000 interest loan at 4% per annum, your actual repayments are $4,000 a year or $333 a month.

Now, banks will assess your borrowing power at principle and interst (P&I) at 7.25%, or higher in some cases.

So on that same loan amount, you would need to show a sufficient income to debt ratio to afford $8,186 per annum or $628 per month.

Looking to rapidly grow your portfolio?

Buying 2-3 properties with a major bank or lender at a high serviceability rate and then buying 2-3 more properties using a non-bank lender is a common strategy.

Some non-bank lenders aren’t regulated by APRA which means they don’t need to adhere to serviceability calculation rules.

Despite the fact that you’ll be charged a slightly higher interest rate with a non-bank, it’s a strategy that may help you to significantly grow your investment portfolio.

Want to know more?

Speak with one of our mortgage brokers by calling 1300 889 743 or by completing our free assessment form.

Compare the two calculations

Once the serviceability has been calculated from your income and expenses, we can then compare it to the maximum purchase price determined by the deposit.

The maximum purchase price for a home loan will always be the lower of the purchase prices dictated by the deposit, and purchase price dictated by serviceability.

Even if someone has a high borrowing capacity, there is no point in giving someone a higher home loan if they don’t have the deposit to cover that loan.

Increase your maximum purchase price

Once you have determined your maximum purchase price, you will have a good idea of what is restricting you. If your serviceability is a bit tight, we suggest that you check out our article Improve my borrowing power and capacity.

Alternatively, if it is your deposit that is holding you back, we suggest you read our article ‘Saving for a home deposit: How to budget‘.

In the end, the lenders make the final decision on maximum purchase price. It is best not to commit to a property purchase until pre-approval.

To find out the best plan for you and get pre-approval, talk to one of our highly experienced mortgage brokers. You can enquire online, or call us on 1300 889 743.

  • R. Chase

    I earn a lot in overtime income and yet I find many banks willing to accept only up to about 80% or so of it in their assessment. I’m sure if they accepted the entire sum I’d automatically be able to borrow more. Aren’t there any lenders that can accept it all?

  • Hi R. Chase,

    If your field of work can be classified as an essential service then there are some banks that may consider 100% of your overtime income in their assessment. This means your line of work must be in healthcare, police, fire and rescue, emergency services or education. Even if you aren’t working in essential services, there may be a few lenders who can consider more than 80% of your overtime income. You can check out the overtime income home loan page or give us a call to learn more:

  • umbagai

    I get family tax benefits so will that be considered as income at the time of assessment?

  • Hey umbagai,

    There a number of lenders that will accept FTB Part A and B as supplementary, or even your sole source of household income, when assessing your home loan application. You’ll have to meet standard lending requirements and provide your most recent Centrelink statement to qualify. Please check out our FTB home loan page if you want to learn more:

  • Stephanie M

    I live rent-free with my parents so will the lenders be okay with that in their assessment?

  • Hi Stephanie M, with most lenders, living rent-free with parents will have no effect. However, some lenders may have a buffer amount such as $150 per week as a rent expense in place, in case you need to move out of home.

  • Hally

    What if I’m on income protection payments? Can I still borrow using these?

  • Hi Hally,

    Yes, you can still get a mortgage using income protection payments. With a select few of our lenders, you may be able to borrow up to 95% of the purchase price if the payments are permanent for at least the next 5 years. Although some banks will only accept 50% of income protection payments, some of our lenders can use 100%. Please call 1300 889 743 if you’d like to discuss this directly with an expert mortgage broker.

  • Gian

    How much does the source of my deposit matter?

  • Hello Gian,

    Each lender has their own policy on the source of a deposit. Even if you have enough funds, you may find yourself unable to obtain a loan because you don’t meet genuine savings requirements. There are a number of other things that can make up your deposit. This includes your own savings or term deposit, monetary gifts, inheritance, tax refunds, First Home Owners Grant and other first home buyer incentives. Please do not forget to leave at least 5% of the purchase price of the house to cover fees and charges associated with buying a property.

  • Tornbull

    What are best possible ways to increase our borrowing power? I couldn’t get the desired borrowing amount when I tried your calculator.

  • Hi Tornbull,
    Usually, your borrowing power will depend on your income, family size, location in which you are currently living, current debts, type of loan and the lender that you choose. There are various ways that you can increase borrowing power.
    – Reduce the limit on or cancel your unused credit cards
    – Consider a fixed interest rate as opposed to a variable rate
    – Extend the loan term
    – Rent out the property
    You can get more info about how could improve your borrowing capacity here