How much mortgage can you afford

The most-asked mortgage question — and the most-misunderstood

“How much can I borrow?” is the first question most people ask when they start thinking about buying a home. It’s also the question that’s most often answered too generously. The amount a lender will lend you and the amount you can comfortably repay are usually two different numbers — and the gap between them is where most household financial stress comes from.

Affordability isn’t about a single magic figure. It’s a combination of income, existing commitments, the loan structure you’re considering, and how much risk you’re willing to take with your monthly cash flow.

The starting point: monthly income, not annual income

Mortgage affordability is calculated on a monthly basis because that’s how mortgage repayments are paid. Convert annual gross income to monthly by dividing by twelve, then subtract any existing monthly commitments — other loan repayments, child support, recurring obligations. The result is the realistic envelope from which a mortgage repayment can be drawn.

If you earn $100,000 a year, your gross monthly income is $8,333. With $500 in other monthly commitments, your starting envelope is $7,833. Lenders care about gross income because tax treatments vary by jurisdiction, but for personal planning, knowing how much is left after you pay yourself a salary and meet existing obligations is the foundation.

The debt-to-income ratio (DTI)

The single most important affordability concept is the debt-to-income ratio — the share of your gross monthly income that goes to debt repayments, mortgage included. Most lenders cap their willingness to lend at a DTI somewhere between 35% and 45% — but personal comfort is usually lower.

A common guideline is the 28/36 rule: housing costs should not exceed 28% of gross monthly income, and total debts (housing plus other debts) should not exceed 36%. This isn’t a law — it’s a heuristic developed during decades of consumer-credit research as the level above which households start running into financial stress under normal life events.

The exact ratio you choose for yourself is a personal decision. Conservative borrowers stay below 28%. Moderate borrowers operate in the 28–35% range. Aggressive borrowers go above 35%, knowing they trade financial slack for the property they want.

Reverse-engineering the loan size

Once you know the maximum monthly payment you’re willing to commit to, you can work backwards using the standard annuity formula:

Maximum loan = monthly payment × ((1 − (1 + r)^−n) / r)

where r is the monthly interest rate and n is the number of monthly periods. The math sounds intimidating, but the intuition is simple: a higher payment, a lower rate, and a longer term all increase the loan you can support. Doubling the monthly payment roughly doubles the loan size. Adding 1% to the interest rate at typical mortgage levels chops about 10–12% off the loan size. Stretching from a 25-year term to a 30-year term adds about 10–15%.

Why deposit size matters more than people think

Deposit doesn’t directly affect monthly affordability, but it shifts the property price you can target and the loan-to-value ratio (LTV). A larger deposit reduces the loan you need for the same property — and many lenders price loans below 80% LTV at significantly lower rates than loans above 80%. So a larger deposit can both reduce the loan amount and reduce the rate, compounding affordability.

A $50,000 deposit on a $500,000 property leaves a $450,000 loan at LVR 90%. A $100,000 deposit on the same property leaves a $400,000 loan at LVR 80%. The second loan is smaller, often at a lower rate, and avoids any high-LVR insurance premium — affordability improves on multiple axes from the same change.

Can borrow vs should borrow

The most important distinction in the entire conversation: lenders quote affordability based on the inputs you tell them. You can usually qualify for a larger loan than you should actually take on. Lenders don’t know about the new car you’re planning to buy, the children’s tuition coming in three years, or the renovation you’re not yet budgeting for.

A useful exercise: calculate the maximum loan a lender will offer, then deliberately choose 70–80% of that figure as your target. The headroom buys you slack against rate rises, life changes, and the inevitable cost overruns of property ownership.

Stress-test the result

Before settling on a target loan, vary the inputs by realistic amounts:

• Add 2 percentage points to the interest rate — can you still service the repayment? (Most lenders run their own version of this test.)
• Subtract 20% from your gross income — would you survive a temporary cut, redundancy, or career break?
• Add a major life expense — a child, a parent’s medical needs, a business you might start.

If the affordability calculation survives all three stresses, the loan is sustainable. If it only just survives the baseline, you’re at the edge of the envelope.

Use the calculators together

Start with our mortgage affordability calculator for a planning estimate based on your income, expenses, and target DTI. Then use our mortgage repayment calculator to model a specific loan size, rate, and term — including the exact monthly repayment and total interest cost. Together they give you a complete picture of what you can borrow and what it will cost.

Remember: any number these calculators produce is a planning tool, not a lending decision. Actual borrowing capacity depends on your lender’s assessment criteria — credit history, employment status, policy stress tests, and product-specific rules. Approach a lender or broker for a formal pre-approval before making property offers.