First home buyers: How much should you borrow for a house?

If you’re a first home buyer, how much money you can borrow for a house and how much you actually should borrow are often two different things.

While both will ultimately come down to your personal circumstances, it is worth keeping in mind that the maximum amount you can borrow, meaning the amount that a lender is willing to offer you, is not necessarily the amount you should borrow.

In this article, we’ll consider both, explaining how banks and other lenders decide how much money they are willing to offer first home-buyers, and then some considerations that you may want to keep in mind when deciding how much you should borrow for a home.

How much can you borrow with a home loan?

The amount of money that you can borrow for a home loan is typically referred to as your borrowing power. This refers to the maximum amount that a lender may be willing to offer you, and the calculation takes into account a number of different factors. These include your income, credit score, assets, debts, expenses and spending habits, your employment status and history, and how much of a deposit you have saved up. For couples borrowing, lenders will look at your combined situation.

• Your income: Lenders will look at your income to help determine how much you might be able to afford to repay on a home loan. Generally speaking, the more you earn relative to your expenses, the more they might be willing to loan you. They may also consider the type of employment you are in, whether that be a full-time, permanent job or something different such as freelance, contract or self-employed work.
• Your credit score: Your credit score is based on your track record of applying for and repaying credit on various products. A high credit score could mean being able to borrow a larger amount relative to the value of the property you are purchasing, or in other words, being able to borrow at a higher loan-to-value ratio (LVR). People with a lower credit score can be seen as riskier borrowers by lenders so they may not be prepared to lend them as much. This can vary between lenders, however.
• Your assets: Existing assets such as a car or shares may improve your borrowing power, as they may demonstrate your ability to save. That said, if you have money owing on those assets in the form of loans, this might reduce your borrowing power.
• Your debts: Existing debts, such as credit cards, personal loans or a buy now pay later balance, may reduce your borrowing power, as a lender may be concerned about your capacity to repay another loan on top of these.
• Your expenses: A lender will ask for an account of your monthly expenses, ranging from the amount you spend on groceries and utilities through to such things as school fees. If your expenses make up too great a portion of your income, your borrowing power may be reduced.
• Your spending habits: Some lenders may even scrutinise your spending habits, including the amount of money you spend on things such as takeaway food and streaming services, and how you pay for these things (e.g. if you use buy now pay later services), to get a sense of what you are like at managing money.
• Your employment history: When deciding whether to lend money to you, banks and lenders will typically consider your employment history.The longer you have been in a stable employment situation, the less risky they might perceive you to be as a borrower.
• Your deposit: When deciding whether to lend you money, banks and lenders will also typically consider the size of your deposit. The larger the deposit you have saved, the greater your borrowing power may be.
• The interest rate: Interest rates can also affect your borrowing power, and generally speaking, the higher the interest rates on offer, the lower your borrowing power might be. This is because banks and lenders are required, thanks to responsible lending laws, to consider your capacity to repay a loan. The higher the rates, the more expensive the loan might be over time, therefore the less they might be willing to lend you.

How much should you borrow for a home loan?

The question of how much you should borrow for a home loan will come down to your own personal circumstances and finances, the particular property you want to buy, and importantly, the size of the deposit you have saved.

• Your personal circumstances and finances: A property is a major purchase, so when buying one, it is worth considering your financial position not just now but in the future. If you foresee that you might change careers or start a family, and that either of these things might lead to your income dropping in future, then you may well be wary of taking on too large a mortgage.
• The property you’re buying: The size and location of the property you wish to buy will also be a large factor in determining how much you borrow. For example, if you plan on purchasing an apartment or townhouse, then you will likely need to borrow less than you would if you plan to purchase a large, multi-bedroom family home. Likewise, properties in areas of high demand such as capital cities tend to be pricier than equivalently sized homes in other places.
• Your deposit: As mentioned above, the size of your deposit can have an effect on the amount a bank or lender will be willing to offer you. The larger the deposit you have saved, the greater your borrowing power might be when it comes time to buy a property.

While everyone’s circumstances are different, for the reasons outlined below, it may be worth your while to save a deposit of 20% of the purchase price of a property before you consider borrowing money for a home loan.

How much deposit do you need to buy a home?

If you are thinking about purchasing your first home, then before you even think about how much you should borrow, you may first be wondering about how much money you need to save in order to put down a deposit.

Generally speaking, banks and lenders recommend that you save at least 20% of the value of a house as your deposit.This would mean, for example, that if you plan to purchase a property that the lender values at $800,000, you would need at least $160,000 saved as a deposit. This is on top of the cash you would need to set aside for other costs of buying property such as stamp duty, a building inspection and conveyancing fees.

The amount of money that a lender will need to loan you relative to the full value of a house is known as loan-to-value ratio (LVR). A 20% deposit will mean that you have an LVR of 80%.

While it is still possible to purchase a home with a deposit of less than 20%, banks and lenders may impose stricter conditions, and you may be required to pay what’s known as lenders mortgage insurance (LMI).

What is lenders mortgage insurance (LMI)?

LMI is a kind of insurance that protects banks and other lenders in the event that a borrower defaults on their home loan repayments. It can either be paid upfront upon the purchase of a property, or added to the loan amount, which means you will pay interest on it as you pay off the loan.

Generally speaking, banks and lenders will require you to pay LMI if you have a deposit of less than 20%. While the cost of LMI can vary depending on a range of factors, you can use the Genworth LMI calculator to give you an estimate of how much it might be for you.

Suncorp advises that it is possible to avoid LMI by having someone – a parent, for example – act as a guarantor for your loan, and agree to take on the debt if you cannot pay it, but it warns that doing so could have consequences for the guarantor.

It also cautions that if you need to factor LMI into the cost of your overall home loan, it could prove to be expensive, especially if variable interest rates go up significantly, as they have throughout the middle part of 2022.

What help is available for first home buyers?

If you are a first home buyer saving for a deposit, you may be able to receive help from the government to save a deposit sooner or to borrow with a smaller deposit.

The First Home Owners Grant (FHOG) scheme is funded by individual state and territory governments around the country. Under the scheme, first home owners are able to receive a one-off grant, as long as they satisfy certain eligibility criteria.

You may also consider the First Home Super Saver (FHSS) scheme, which allows some first home buyers to save a home deposit via making extra contributions to their super fund. You may also be eligible for exemptions or concessions on stamp duty, or the federal government’s First Home Guarantee, which could help you avoid paying LMI even if you have a small deposit. If you are saving for a home deposit, Canstar has a list of things you might consider to help you out in your journey to becoming a home-owner.

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