How do mortgage lenders calculate affordability in Australia?

At a glance

  • The mortgage affordability in Australia is primarily determined by two key metrics, namely loan-to-income ratio (LTI) and loan-to-valuation ratio (LVR), used by lenders to assess the risk associated with the loan.
  • Various factors including income, credit history, existing debt, and lifestyle expenditures among others are taken into account while calculating mortgage affordability.
  • The process of mortgage approval involves evaluating the borrower’s financial information, credit check, and verification of income and assets. Understanding the calculation of mortgage affordability requires a well-rounded view of the borrower’s financial situation, current market conditions, and the lender’s specific criteria.

Understanding the Calculation of Mortgage Affordability in Australia

Key Metrics for Calculating Mortgage Affordability in Australia

When it comes to buying a home in Australia, understanding your mortgage affordability is crucial. The two primary metrics used by lenders to determine this are the loan-to-income ratio (LTI) and the loan-to-valuation ratio (LVR).

Loan-to-Income Ratio (LTI)

The LTI is a comparison of the amount you wish to borrow against your total gross income. This ratio is a tool for lenders to assess the risk associated with the loan. It’s an effective way to measure your repayment capability. A lower LTI is preferable as it suggests that the borrower has sufficient income to manage their loan repayments without financial strain. Financial experts usually recommend that your LTI should not exceed a certain threshold to maintain a healthy balance between your earnings and your debt obligations.

Loan-to-Valuation Ratio (LVR)

The LVR is the proportion of money you borrow compared to the value of the property you intend to purchase. It is calculated by dividing the loan amount by the appraised value of the property and is expressed as a percentage. A lower LVR is beneficial as it often leads to more favorable loan terms, and it may eliminate the need for lender’s mortgage insurance (LMI). Lenders generally prefer an LVR of 80% or less, as a higher LVR represents increased risk. Should you borrow more than 80% of the property’s value, you may be required to pay LMI, which protects the lender in case you default on your loan.

Both LTI and LVR are critical in determining the maximum mortgage amount you can afford. Lenders use these ratios to ensure that borrowers are not overextending themselves financially and to gauge the potential risks associated with extending credit.

Factors Considered in Mortgage Affordability

Lenders consider a variety of factors when calculating mortgage affordability, including:


Your income is the foundation of how much you can borrow. Lenders will review your salary in detail, alongside any supplementary sources of income such as bonuses, rental income, dividends from investments, or freelance work. The stability and longevity of your income streams will also be scrutinized. This comprehensive review helps lenders paint a picture of your financial health and predict your ability to sustain mortgage repayments over time.

Credit History

A good credit history is indicative of a trustworthy borrower. It signals to lenders that you have a record of making timely repayments and managing your debt responsibly. Lenders will examine your credit score, any defaults, or irregularities in your credit file. A higher credit score could lead not only to a greater borrowing capacity but also potentially lower interest rates and more favorable loan terms.

Existing Debt

All outstanding debts, including personal loans, credit card debt, car loans, and other credit lines, will be considered when calculating your loan eligibility. Lenders assess this within the context of your LTI to understand the impact of these commitments on your potential mortgage payments. Managing your debt efficiently and maintaining a low level of existing debt can work in your favor when you apply for a mortgage.

Other Considerations

The number of dependents you support can significantly influence your perceived ability to repay a mortgage, as dependents directly affect your non-discretionary expenses. Similarly, your lifestyle expenditures, which include discretionary spending on travel, entertainment, and hobbies, will be taken into account. These can reduce your disposable income, thereby impacting your ability to meet mortgage repayments.

Estimating Your Mortgage Affordability: An Australian Perspective

To estimate your mortgage affordability, you can use online tools like the Borrowing power calculator provided by Westpac or the Mortgage calculator from These tools are designed to help you input your financial details such as income, expenses, and financial commitments, to give you an approximation of how much you might be able to borrow. They are an excellent starting point for would-be homeowners to understand their potential buying power.

Additionally, the current climate of the Australian property market also plays a significant role in affordability. Market factors such as supply and demand, the health of the economy, interest rate trends, and the general direction of the housing market are crucial in determining property prices and, by extension, how much you can afford to borrow. It’s important to stay informed about the market conditions as they can fluctuate and impact your borrowing capacity.

The Influence of Interest Rates on Mortgage Affordability

Interest rates are a fundamental component of mortgage affordability. They directly influence the cost of borrowing and, consequently, the size and sustainability of your monthly mortgage repayments. Lower interest rates can make borrowing more affordable and allow you to qualify for a larger loan. However, it’s crucial to factor in the possibility of rate changes over time and their potential impact on your financial situation.

Fixed vs. Variable Interest Rates

Fixed interest rates remain the same for a specific term, offering stability and predictability for your mortgage repayments. This is particularly appealing if you prefer to budget with certainty. On the other hand, variable interest rates fluctuate in response to market conditions and changes in the Reserve Bank of Australia’s cash rate. Though they can lead to lower payments when rates decrease, they can also increase your repayment amounts when rates rise. Deciding between a fixed or variable rate will depend on your risk tolerance, financial stability, and market predictions.

The Mortgage Approval Process in Australia: What to Expect After Your Affordability Calculation

Once you have a ballpark figure of your mortgage affordability, the next step in your home buying journey is to navigate the mortgage application process. This will typically involve providing detailed financial information to prospective lenders, undergoing a credit check to verify your finances, and having your income and assets examined to confirm your ability to service the loan.

Typical Time-frame for Mortgage Loan Approval or Denial

The time-frame for mortgage approval can vary between lenders and individual circumstances, but it generally takes from a few days to several weeks. During this period, the lender will scrutinize your application against their precise lending criteria to make an informed decision. The comprehensive nature of this assessment is to ensure that both the borrower and lender are entering into a mutually beneficial and sustainable financial arrangement.

What Happens If Your Mortgage Loan Is Rejected?

If your mortgage application is not successful, it’s crucial to understand the reasons behind the rejection. Common reasons can include insufficient income to service the loan, a poor credit history, high levels of existing debt, or even issues with the property itself. Once you identify the reason for the denial, you can take appropriate measures, such as improving your credit score, paying down debt, or increasing your income, before you attempt to reapply for a mortgage loan.

For more detailed information on how banks calculate borrowing power, and for industry insider tips, you can refer to the guide provided by the Home Loan Experts.

In conclusion, the journey towards understanding and calculating mortgage affordability in Australia involves taking a comprehensive look at your personal financial situation, considering current market conditions, and being aware of the specific criteria and processes set by lenders. By carefully considering these factors, you can approach the property market with confidence and increase your chances of securing a mortgage that supports your homeownership goals.

About the author 

Harold Simmons

Harold is the founder and creator of the Asset Owners Discussion Project. He creates quality resources so investors can get access to information they wouldn't normally be able to access. He has been investing in real estate for almost three decades and is particularly experienced with mortgages and refinancing.

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