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Borrowing for a mortgage - How much could I borrow?

The amount you can borrow for a home depends on a couple of things: how much you can afford to repay on your current income, and how much a lender will lend on a property. Lenders want to be sure that you’ll be able to keep up with your repayments and still have enough money left over to live on. They don’t all use the same method to work this out, however.

How much can I afford to repay?

Percentage of income

Some say that fixed payments (mortgage repayments plus any other loan or hire purchase payments) should be no more than 30–40% of gross income.

If you know your income and what your existing fixed payments are, you can work backwards to find the level of mortgage repayment a lender will allow. Then you can experiment and see what size loan you could afford with these repayments.

It’s important to consider the impact on your ability to meet your repayments if interest rates go up. Not sure how to calculate mortgage repayments? Our mortgage calculator will help you see what the payments would be if the interest rate went up by 1%, 2% or more.

Some lenders also have calculators on their websites to give a rough idea of how much they may lend. These calculators may not take into account your current debt situation, so you’ll need to contact the bank or a mortgage broker directly to get a better indication.

Minimum surplus

Some lenders calculate a minimum ‘surplus’ that we should have left over each month after fixed payments and a living allowance are deducted. This is called ‘UMI’ (uncommitted monthly income) and varies from bank to bank.

For a couple, the calculations are based on combined income. For someone with children, lenders will expect to see less surplus.

If you’re borrowing a high proportion of the purchase price, lenders will expect you to have more spare income. This is so you can deal better with any future uncertainties like a rise in interest rates or a reduction in income. For example, if someone is borrowing 95%, some banks will want to see a UMI of $750 to $1,000 a month.

Flatmates helping with the bills

Planning to get flatmates in to help pay the mortgage? Some lenders will count 70% to 80% of their rent towards your income. Other lenders won't include any.

The easiest way to find out how much you can borrow through a lender is to give them your income and spending details and ask them to make the calculation. Or, you could ask a mortgage broker to do this.

Based on the details you give them, a lender may give ‘pre-approval’ of the amount they are willing to lend. The key is to treat this as an upper limit rather than a starting point!

How much will a bank lend on a property?

Generally, we can expect a lender to lend up to 80% of the value or price of a house (generally whichever is lower). Often, lower percentages are loaned on properties outside urban areas and on apartments. These figures are sometimes called the ‘loan to value’ ratio, or ‘LVR’.

It is possible to borrow up to 95% of a property’s value in some cases. But that’s a big risk for both the borrower and the lender.

You may face two extra costs when borrowing a high proportion of a property’s value:

Most lenders will charge either a low-equity premium or mortgage indemnity insurance if you borrow over 80%. This helps to protect them from the risk that you might not keep up repayments – it does not protect you from the obligation to repay. The premium is a lump sum that you can pay in cash or add to the amount you borrow. Some banks add a margin to the interest rate to reflect the risk. This can vary, so it pays to shop around.
Lenders may also ask for a valuation on the property. If there is a difference between the purchase price and the valuation, lenders usually work out how much they'll lend on the lower figure. As a rule, if borrowing more than 80% or buying privately the bank will insist on a registered valuation.

Talking to one or more lenders, or to a local mortgage broker, can give a good idea of the lending limits for the types of property you want to buy and the area you want to buy in.

House deposits

Most lenders will want you to have a cash deposit to put towards your home. People are usually more committed to keeping up repayments on a loan if some of their own money is invested in the property from the start.

Whether the cash is money saved or a gift from a family member doesn't matter to most lenders. Most won’t accept deposits raised through loans. This would raise your financial commitments and make it tougher for you to meet all your payments.

However, if you are borrowing 95% of the property’s value a bank is likely to want to see the deposit as being saved, not received as a gift.

Government help

For many of us, house prices seem to be rising faster than we can save. To help, people who can afford mortgage repayments but are unable to save the 20% deposit now required by most lenders may be eligible for a First Home Loan. The lending criteria are different to standard loans; there are income and house price limits.

Members of the KiwiSaver scheme may also become eligible, after three years of contributing, for a KiwiSaver HomeStart grant. This is in addition to a first home savings withdrawal option, also available after three years’ membership.

For more information on how KiwiSaver can help first home buyers, visit the Housing New Zealand website.

Credit reports

Anyone who’s been chased by debt collectors for things like missed hire purchase payments or an unpaid power bill probably has this recorded on their credit report.

Because of this, lenders may only lend them a lower proportion of the property price, or may turn them down altogether. Someone who can’t get a loan from standard lenders may have better success with a specialist in higher-risk loans. These lenders are usually only accessible through a mortgage broker and the total cost of borrowing is likely to be higher.

Guide to shopping for a mortgage

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Borrowing for a mortgage - How much could I borrow?

How much can I afford to repay?

Percentage of income

Minimum surplus

Flatmates helping with the bills

How much will a bank lend on a property?

House deposits

Government help

Credit reports

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