Can I Afford This Property?

Can I afford this property? The two tests that decide it

Almost every buyer asks the question the wrong way around. "How much can I borrow?" is only half the answer — plenty of buyers are approved for a loan they can't complete on, because stamp duty and purchase costs quietly eat the deposit. Affordability is the intersection of two independent tests, and you need to pass both on the same day.

The serviceability test asks whether your income can carry the repayment when it's stress-tested at roughly 3% above the actual rate. The deposit and cash test asks whether the money in your account covers the deposit after transfer duty, conveyancing, searches, building and pest, and lender fees have been paid. This calculator runs both and reports the tighter of the two, which is why the verdict sometimes says "May stretch" even when your borrowing power looks generous.

How much house can I afford — the honest formula

Your realistic ceiling is your borrowing capacity plus your usable deposit, where usable deposit is your savings less duty and costs. On a $850,000 purchase in VIC that gap is real money: duty and upfront costs of roughly $49,270 come off your savings before a single dollar goes toward the deposit. That's why buyers who assumed "capacity plus savings" are so often $40,000 to $80,000 out.

• Borrowing capacity — set by income, assessed living expenses, dependants, debts and credit card limits.
• Deposit after costs — savings minus stamp duty, conveyancing, searches and lender fees.
• LVR ceiling — up to 95% for owner-occupiers, commonly 90% for investors, 95% with no LMI under the First Home Guarantee.
• LMI — payable above 80% LVR and usually capitalised onto the loan rather than paid in cash.

What quietly shrinks your affordable price

Credit card limits are the most under-appreciated killer. Lenders assess around 3.8% of the limit as a monthly commitment whether or not you owe a cent — your $5,000 of limits is being treated as about $190 a month here. Dependants lift your assessed living expenses through the HEM benchmark, and lenders use the higher of your declared expenses and HEM, so understating your spending doesn't help you.

Investment purchases are assessed with a higher rate and usually a 90% LVR cap, and rental income is typically shaded to 80%. First home buyers, on the other hand, often gain far more from duty concessions than they expect — in several states a concession is worth more to affordability than an extra $20,000 of savings, because it frees cash at settlement rather than adding to the loan.

Worked example

A couple earning $105,000 and $72,000 with $140,000 saved and a $20,000 credit card limit were looking at $900,000 properties. Their capacity was fine at around $780,000, but after Victorian duty and costs their usable deposit fell to roughly $92,000 — leaving a required loan of $808,000, above capacity, and an LVR of 90%. Closing the credit card lifted capacity by about $85,000 and dropping their target to $850,000 cut duty materially. The same couple went from "Outside range" to "Affordable" without earning another dollar.

If the answer is "outside range"

• Close or reduce credit card and buy-now-pay-later limits before applying.
• Pay out a small car or personal loan if it doesn't gut your deposit.
• Check first home buyer duty concessions and the First Home Guarantee price cap for your state.
• Test a slightly lower price — duty is progressive, so a small price cut can free disproportionate cash.
• Compare lenders: assessment rates, expense floors and income shading vary enough to move six figures.

Keep reading

• Borrowing power calculator — the serviceability side in detail.
• Property purchase cost calculator — every upfront cost itemised.
• Stamp duty calculator — duty and concessions by state.
• LMI calculator — what a small deposit really costs.
• How much can I borrow on my income? — worked figures by salary.
• First home buyer guide by state — grants, caps and concessions.