Understanding mortgage affordability

Lenders consider your income, outgoings, credit history and existing financial commitments when calculating affordability. They also stress-test your income using a higher interest rate than the current pay rate. This helps the lender to determine whether you could afford the repayments in the long term if interest rates were to rise or your financial circumstances were to change.

However, borrowing criteria can vary by lender and individual circumstances – speak to a mortgage adviser for tailored support.

How to determine mortgage borrowing potential

You can use a budget planner to get a clearer picture of your finances and what you could realistically afford to borrow.

What affects how much you can borrow?

Several factors can influence your borrowing amount, such as:

• Monthly income and how it is made up (e.g. basic salary, commission, bonus or overtime)
• Your age
• Whether you have any dependents
• Monthly outgoings (e.g., bills, childcare, loans, subscriptions)
• Credit score
• Existing financial commitments (e.g., car lease, credit cards)
• Deposit size
• Employment type (e.g., employed, self-employed, fixed-term contract)

How lenders assess affordability

Lenders use detailed affordability assessments to check whether you can comfortably manage repayments. This includes:

• Income verification. Payslips, P60, or self-employed accounts help lenders confirm your earnings
• Outgoings review. Using recent bank statements, they’ll look at your regular spending, including bills, credit commitments and lifestyle costs
• Stress testing. Lenders check whether you could still afford repayments if interest rates rise in the future, or if your circumstances were to change
• Credit checks. Your credit history helps lenders understand how reliably you’ve managed borrowing in the past

First time buyer considerations

If you’re a first time buyer, lenders may look more closely at your:

• Credit history
• Deposit source
• Employment stability
• Spending patterns

Wondering ‘how much can I borrow as a first time buyer’? Our guide to first time buyer mortgages has more information.

Using a mortgage broker

Using a mortgage broker is optional, so it may not be necessary for every buyer. However, a mortgage broker can help you understand your borrowing potential and find mortgage deals for your circumstances. They compare products across multiple lenders and guide you through the application process.

Benefits of using a mortgage broker

Mortgage brokers can offer support in several ways, including:

• Access to a wider range of lenders and deals. Whole-of-market brokers aren’t tied to one lender, meaning you can access a broader range of deals. They may also have access to exclusive broker-only mortgage products
• Expert guidance on affordability and eligibility. Getting a mortgage can be complex, especially if you’re a first-time buyer. Lenders differ in how they assess affordability and apply lending criteria, meaning the amount you can borrow and the products available can vary significantly from one lender to another. Having a broker to guide you may help the process run smoothly – check out our guide for more information on using a mortgage broker
• Support with paperwork and documentation. This can save you time and help you stay organised during the mortgage application process

When using a mortgage broker can be helpful

A broker can also be useful if you:

• Are self-employed, have multiple income sources or variable income. Getting a mortgage can be more challenging in these circumstances, as you’ll have to provide additional evidence of your income. A mortgage broker can help you gather these documents
• Have a low credit score or limited credit history. Mortgage brokers can recommend lenders that suit your circumstances, including specialist lenders that aren’t available directly to the public
• Are using a gifted deposit. There are several legal implications when using a gifted deposit to buy a home, so you’ll need to prepare some additional documentation, which a mortgage broker can advise on

Do mortgage brokers charge fees?

Some mortgage brokers charge a fee that varies by broker and the complexity of your application. You should check if they will do so before using their services. This may be:

• A fixed fee. Some brokers have a fixed fee to find and arrange a mortgage for you. You may want to agree on the fee in writing before using their services
• A percentage of the loan amount. Many brokers set their fee as a percentage of the mortgage value

Even if they do charge a fee, most brokers offer a free initial consultation to help you understand your options before committing. It can be useful to get written confirmation of the fee (or an estimate) before working with a broker, no matter how they charge.

How to prepare for a mortgage application

There are several steps you can take to help strengthen your application before applying for a mortgage, including:

• Checking your credit report. This can give you an idea of how creditworthy a lender may find you. Checking your score well in advance of your mortgage application can give you time to improve it
• Registering on the electoral roll. Lenders use the electoral roll to confirm your address
• Paying bills on time. This shows lenders you’re reliable and would be able to keep up with mortgage payments
• Reducing existing debts. Your debt-to-income ratio is one of the key factors lenders consider when reviewing your mortgage application. Having a lower debt-to-income ratio can signal to lenders that you’re a lower-risk borrower
• Gathering key documents early. Lenders may want to see payslips and bank statements from the 3-6 months before you apply for a mortgage, so having these on hand can make the process smoother
• Avoiding new credit applications. New or rejected credit applications can be affordability red flags for lenders
• Removing out-of-date financial associations. If you had a joint account with a former partner, friend or housemate, you could still be financially linked. Their financial history could affect your mortgage affordability, so you may want to close any out-of-date joint accounts and file a Notice of Disassociation

Mortgage calculators and tools

Online mortgage calculators can help you estimate:

• How much you can borrow
• Your monthly repayments
• How different interest rates affect affordability

Budget planners are another useful tool that can provide a clearer picture of your finances and help you understand your borrowing potential. They can help you establish:

• Whether you’re currently spending more than what you earn
• Where your money is going

Once you know this, you can work out what you can realistically afford to spend or save each month and identify any areas for improvement.

These tools can be a helpful starting point before speaking to a lender or broker. However, they don’t take into account all the criteria lenders may consider, so the actual figures may differ.