How Much Should You Really Borrow for a Home?

Borrowing Capacity and Affordability Are Not the Same Thing

Getting approved for a large home loan can feel like good news.

You speak to a lender or mortgage broker, provide your income and expenses, and eventually hear the number you have been waiting for:

For many buyers, that number immediately becomes their property budget. A $900,000 borrowing capacity plus their deposit might suddenly mean looking at properties around $1 million or more.

But there is another question that deserves just as much attention:

Just because a lender may be prepared to lend you $900,000, should you actually borrow $900,000?

Those are two very different questions.

A lender's borrowing capacity calculation is designed to assess whether your application meets its credit and servicing requirements. It doesn't know whether you want another child in two years, whether one partner plans to reduce working hours, whether you want to keep travelling, send children to private school, build an investment portfolio or simply sleep comfortably at night knowing there is money left over after the mortgage is paid.

This is where home loan borrowing capacity and real-life affordability can start moving in different directions. At Triple O Finance, we believe borrowers should understand both numbers before deciding what they are comfortable spending on a property.

Borrowing Capacity Is Not The Same As Affordability

Borrowing capacity is an estimate of how much a lender may be prepared to lend based on its credit policy. Affordability is a much more personal question. It asks whether the mortgage repayments actually fit the life you want to live.

That distinction matters because lenders assess an application using income, existing debts, living expenses, dependants, credit limits, loan terms and other commitments. They also apply their own servicing assumptions.

Australia's prudential regulator, APRA, currently requires regulated banks to assess new housing borrowers using a mortgage serviceability buffer of at least three percentage points above the applicable loan rate.

That buffer is important because it is designed to provide additional protection if interest rates rise or a borrower's financial circumstances deteriorate.

But it still doesn't create your household budget for you. A bank may conclude that you satisfy its lending criteria. That doesn't necessarily mean borrowing to the maximum will leave enough room for everything else that matters to you.

What Does A $900,000 Mortgage Actually Look Like?

Large numbers can feel abstract until you convert them into monthly cash flow.

Using a 30-year principal-and-interest home loan as an example, a $900,000 mortgage at 6.15% would require repayments of approximately $5,483 per month. 

That is roughly $65,800 per year in mortgage repayments.

Now consider what happens if the interest rate were two percentage points higher.

At 8.15%, the same $900,000 mortgage would require repayments of approximately $6,698 per month. That is around $1,215 more every month, or roughly $14,580 more each year.

Illustrative repayment examples only. Calculations assume a 30-year principal-and-interest term and exclude fees. Actual repayments depend on your loan, rate and lender.

This is not a prediction that rates will rise by two percentage points. It is a household stress test.

Moneysmart recommends borrowers consider what repayments would look like if interest rates increased by around two percentage points. It is useful because it changes the conversation from what you can afford today to what your household could absorb if circumstances changed.

At 6.15%, borrowing $800,000 instead of $900,000 represents roughly $609 per month of additional cash flow. For one household that may be easily manageable. For another, it could represent childcare, investing, school costs, holidays or simply the buffer that prevents unexpected expenses from becoming stressful.

The Bank Does Not Know Your Five-Year Plan

Imagine a professional couple earning a combined $220,000 per year.

They have good employment, limited consumer debt and a solid deposit. After assessment, they discover that their maximum home loan borrowing capacity is around $900,000.

On paper, they may be able to purchase at the top of their range.

But suppose they also tell us that within the next three years they would like to have their first child. One partner may take parental leave and later return to work three days per week. They would also like to continue contributing $1,000 per month towards investments and take an overseas holiday every second year.

Their lender's servicing calculator cannot fully understand the emotional or lifestyle importance of those plans.

Perhaps they decide that $750,000 or $800,000 of debt feels comfortable even though substantially more is technically available. That isn't failing to maximise borrowing capacity. It may simply be successfully managing risk.

Your Personal Borrowing Limit Should Include The Life You Expect To Live

A useful way to approach a home purchase is to think about two borrowing limits.

The first is your lender maximum. This tells you what may be possible under lender policy.

The second is your personal maximum. This is the amount you are prepared to borrow after considering your actual life.

Your personal maximum should take into account more than current bills. Think about where your household may be three, five or even ten years from now.

Will you have children? Could one income temporarily reduce? Are school fees likely? Do you expect to upgrade cars? Would you like to continue investing? Do you help parents financially? Are you planning major travel? Could you handle a period between jobs without immediately relying on credit cards?

None of these necessarily means you should borrow less. But they should be part of the decision. A home should ideally improve your life. It should not leave you feeling financially trapped by the repayments required to keep it.

Why Online Borrowing Power Calculators Can Be Misleading

Online borrowing power calculators are useful for obtaining a rough estimate. They should not be treated as an approval or a final property budget.

Different lenders assess borrowers differently. The same household can receive materially different borrowing capacity outcomes depending on the lender assessing the application.

This can happen because lenders may treat overtime, bonuses, allowances, commissions, rental income, existing debt and living expenses differently.

The situation becomes particularly important for professionals whose income is not simply a fixed base salary.

A nurse may receive shift penalties and overtime. A police officer may receive allowances, loading, overtime or higher duties. A medical professional may receive income from several employment or business sources. A self-employed borrower may have business income that requires a completely different assessment.

This means someone who receives an online estimate of $750,000 should not automatically assume that $750,000 is either their maximum borrowing capacity or their appropriate borrowing amount. First understand what is realistically available. Then decide how much of that availability you actually want to use.

Why Two Lenders Can Give You Two Different Answers

Many borrowers assume lending is mathematical. Income goes in, expenses come out, and every bank should reach approximately the same answer.

In practice, lender policy matters enormously.

One lender may recognise a particular income source more favourably. Another may assess an existing commitment differently. A lender may calculate living expenses differently or have a different appetite for a particular borrower profile.

This is one reason going directly to your existing bank may not provide a complete picture.

Your bank may give you a perfectly accurate answer based on its own lending policy. But that doesn't necessarily tell you what another lender may be prepared to do.

The objective shouldn't be to find whichever lender will lend the absolute largest amount regardless of everything else. The objective is to understand the available options and select an appropriate lender and loan structure for your circumstances and objectives.

Don't Confuse Pre-Approval With A Spending Target

Another mistake we see is borrowers treating pre-approval like permission to spend every dollar available.

Imagine receiving pre-approval for a purchase price of $1.05 million. The natural temptation is to start searching from $950,000 to $1.05 million.

But pre-approval should define the outer boundary of what may be possible, not necessarily what should be spent.

There may be excellent properties at $900,000 that satisfy the buyer's needs while leaving substantially greater financial flexibility.

Property buyers can experience an unusual psychological effect. Once they know they can potentially afford $1 million, an $850,000 property may suddenly feel like a compromise even if it would have looked fantastic two weeks earlier.

The lending number can unintentionally become the property goal. Try to reverse that thinking. Start with the lifestyle and property requirements, then determine how much debt is necessary to achieve them.

Your Deposit And Loan Amount Need To Be Considered Together

Borrowers often spend years concentrating on the deposit while giving much less thought to the debt that remains after settlement.

Suppose two buyers purchase the same $1 million property.

The discussion is not simply that Buyer B has a bigger deposit. Their ongoing cash-flow position is also different.

Using the 6.15% example above, the approximate difference between the $900,000 and $800,000 loans is around $609 per month.

Over one year, that is approximately $7,300 of cash-flow difference before considering changes in interest rates.

This doesn't mean everyone should wait until they have a 20% deposit. There may be good reasons to purchase earlier with a smaller deposit. The point is that deposit strategy and repayment strategy are two sides of the same decision.

The Buffer You Keep After Settlement Matters

There is another number that deserves attention:

How much money will you have left after you buy the property?

We sometimes see buyers become so focused on getting into a home that they consider putting almost every available dollar into the purchase.

That may reduce the loan amount, but it can also leave the household with very little liquidity after settlement.

Then life happens. The hot-water system fails. The car needs repairs. Rates arrive. Insurance is due. A child becomes sick. An unexpected trip is required.

Suddenly a household that owns a valuable property is relying on a credit card to meet a relatively small emergency.

This is why the best deposit strategy is not automatically “put every dollar you have into the property.” The appropriate buffer varies between households. The important point is to think about it before settlement, not after the emergency occurs.

Stress-Test Your Lifestyle, Not Just The Mortgage

Banks already stress-test home loan applications. Borrowers should do something similar, but in a more practical way.

Take the expected mortgage repayment and imagine it were $500, $1,000 or even $1,500 higher each month.

Where would the money come from?

Would you stop investing? Cancel holidays? Reduce entertainment? Use savings? Would the household still feel comfortable?

Now test another scenario. What happens if one income drops temporarily? Could you continue making repayments for three months? Six months?

This isn't about frightening people away from buying property. It is about making sure the home loan remains manageable when life doesn't go exactly according to plan. A mortgage is usually a commitment measured in decades, and your financial circumstances will almost certainly change during that period.

The Cheapest Property Is Not Automatically The Safest Choice Either

There is an important balance here.

We are not suggesting borrowers should always buy significantly below their borrowing capacity. Being excessively conservative can also have consequences.

A family may purchase a smaller property only to outgrow it two years later. Selling and purchasing again introduces agent fees, legal costs, stamp duty and moving expenses.

Someone may purchase far from work simply to reduce the loan amount, then discover the commute substantially affects their quality of life.

What Should You Look At Before Deciding Your Home Loan Budget?

Start with the lender assessment because you need to understand what is possible.

Then step away from the lender calculator.

Look at your actual bank account. Calculate the likely mortgage repayment. Add council rates, strata where applicable, insurance, maintenance and normal household expenses.

Consider what you are currently saving each month. Then ask yourself what you would like your finances to look like after buying the property.

If the proposed mortgage absorbs virtually every dollar of current savings capacity, understand that clearly before proceeding.

If the repayment leaves a comfortable monthly surplus, that may provide greater flexibility. Neither outcome is automatically right or wrong. What matters is that the decision is deliberate.

So, If You Can Borrow $900,000, How Much Should You Borrow?

There is no universal percentage or formula.

Someone approved for $900,000 may comfortably borrow the full amount. Someone else with exactly the same borrowing capacity may decide that $750,000 is their limit.

Both decisions could be perfectly reasonable.

The answer depends on your income stability, lifestyle, deposit, future plans, household expenses, existing commitments and comfort with financial risk.

This is where good lending advice should move beyond simply obtaining the highest approval.

Once those questions are answered, maximum borrowing capacity becomes useful information rather than a spending target.

Knowing how much you should borrow is more important.

Your borrowing capacity establishes what may be possible under lender policy.

Your personal budget establishes what is sustainable for your life.

The strongest home-buying decisions usually happen when those two numbers are considered together.

If you are thinking about buying a home, start by understanding your real borrowing capacity across appropriate lenders. Then work backwards from your lifestyle, future plans and repayment comfort to determine the property budget that makes sense for you.