1. What is the Borrowing Capacity Formula?

The borrowing capacity formula calculates the maximum loan amount (principal) you can borrow based on your affordable monthly payments, interest rate, and loan term. It's essential for Australian home buyers to understand their borrowing power before house hunting.

2. How Does the Calculator Work?

The calculator uses the present value of annuity formula:

Where:

• \( P \) — Principal loan amount (AUD)
• \( PMT \) — Affordable monthly payment (AUD)
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (term in years × 12)

Explanation: The formula calculates how much you can borrow given what you can afford to pay each month, considering interest and loan duration.

3. Importance of Borrowing Capacity

Details: Knowing your borrowing capacity helps set realistic property price ranges, prevents overcommitment, and ensures loan repayments remain manageable within your budget.

4. Using the Calculator

Tips:

• Enter your comfortable monthly repayment amount (typically 30-35% of your income)
• Use current market interest rates (default is 6.49% p.a.)
• Standard loan terms are 25-30 years in Australia
• Remember to account for other costs like stamp duty and fees

5. Frequently Asked Questions (FAQ)

Q1: What's the average borrowing capacity in Australia?
A: Varies widely by income and location. As of 2024, average borrowing capacity ranges from $500,000 to $1.2 million for typical households.

Q2: How does interest rate affect borrowing power?
A: Higher rates reduce borrowing capacity. A 1% rate increase can decrease borrowing power by ~5-10%.

Q3: What other factors affect actual loan approval?
A: Lenders consider credit history, living expenses, debts, employment stability, and loan-to-value ratio.

Q4: Should I borrow my maximum capacity?
A: Not necessarily. Consider buffer for rate rises and life changes. Many financial advisors recommend borrowing below maximum.

Q5: How often should I recalculate borrowing capacity?
A: Whenever interest rates change significantly, your income changes, or before serious property searching.