How much can you actually borrow for a home in New Zealand?
One of the first questions people ask when looking to buy a home is: “How much can I borrow?”
You might think the answer is simply based on your income and deposit. But in New Zealand, banks look at a much bigger picture when assessing a home loan. Your income, expenses, existing debts, deposit and the bank’s servicing requirements can all affect how much you can borrow.
How do banks calculate borrowing capacity?
When a bank assesses your mortgage application, it looks at whether you can comfortably afford the proposed loan. This is known as servicing.
The bank considers things such as:
- Your salary or self-employed income
- Your deposit
- Existing mortgages and other debt
- Credit card and overdraft limits
- Student loans and car finance
- Household expenses
- Number of dependants
- The proposed mortgage repayments
It then calculates whether you have enough income left over to support the new lending.
Mortgage stress testing
One of the biggest surprises for borrowers is that the bank doesn’t usually assess your mortgage using the interest rate you will actually pay. Instead, banks use a higher servicing or stress-test interest rate to make sure you could still afford your mortgage if interest rates increased. This can have a significant impact on your borrowing capacity.
So while an online mortgage calculator might suggest you can afford a certain loan based on today’s interest rates, the bank’s assessment can produce a different result.
Your expenses matter
Your income is only one side of the equation. Banks also look at your household spending, including things like groceries, insurance, childcare, transport, subscriptions and other regular expenses. Even relatively small commitments can make a difference when you’re close to your maximum borrowing capacity.
Some common surprises include:
Credit card limits – You may only owe $500 on a $10,000 credit card, but the bank may consider the available limit when assessing your application.
Buy Now Pay Later – Facilities such as Afterpay can still be considered as financial commitments.
Student loans – Repayments can reduce the income available to service a mortgage.
Car and personal loans – It’s not just the balance that matters; the regular repayments can significantly affect borrowing capacity.
Self-employed income – Banks may assess business income differently and often require financial accounts or a history of sustainable income.
Why can different banks give you different answers?
Different New Zealand banks can have different:
- Servicing rates
- Expense assumptions
- Policies around self-employed income
- Treatment of bonuses and overtime
- Lending criteria
- Treatment of existing debts
So if one bank says you can borrow $600,000, another lender may reach a different result. This is one of the benefits of speaking with a mortgage adviser in New Zealand. Rather than simply asking, “How much will a bank lend me?”, the better question is:
“Which lender is most likely to work with my circumstances?”
How much should you actually borrow?
Your maximum borrowing capacity isn’t necessarily your ideal borrowing amount. A bank may be prepared to lend you a certain amount, but you also need to consider your lifestyle, future plans, interest rates and how comfortable the repayments will be.
Whether you’re a first home buyer, looking to refinance, buying an investment property or building a new home, understanding your borrowing capacity before you start looking can save a lot of time and frustration.
At Home Loan Advice, we help clients understand how much they may be able to borrow and which lenders could be the best fit for their circumstances. Getting in touch early will save you time and energy along the way. So, if you’re thinking about buying, refinancing or getting pre-approved? Get in touch with Home Loan Advice to discuss your options.