How much can I borrow with a home loan?
The answer to this question would be straightforward if there was a single definition of a home loan. However, people have started using the term home loan to refer to different types of credit options, which means the answer depends on what is really meant by a home loan.
This guide provides clarity on how much you could borrow with a home loan for every definition. Read on for a simple answer based on your situation.
What is a home loan?
A home loan has become a fluid term that means different things to different people. The most agreeable definition of a home loan is that it is a loan used to buy a home, also known as a mortgage. In this instance, a home loan can be a significant amount that is repaid over many years – as many as 30+.
But a home loan is also sometimes times referred to as:
- A loan that helps you borrow against your home equity (home equity loans, secured homeowner loans etc)
- A loan that helps you release equity (lifetime mortgage)
These sound awfully similar and probably raise a few eyebrows and cause confused faces, so let’s explain.
In number one, the loan is secured against home equity to get a better deal, but if you fail to keep up repayments to the lender, your home may be repossessed. Whereas in number two, the homeowner is essentially selling their home to the lender to receive near its full value, but they continue living in the property without contest until they die or move into aged care.
More often than not, a home loan is another word for a mortgage, but it’s important to be aware of how some other people may use the term.
How much could you borrow with a home loan?
How much you could borrow with a home loan will depend on personal circumstances, but it will also hinge on what exactly is meant by a home loan. The amount you can borrow may differ between a home loan as a mortgage, as a way to borrow against equity and as a way to release equity.
How much can I borrow – home loan mortgage
How much can I borrow for a mortgage based on my income?
How big of a mortgage you can get is based on multiple factors, such as your employment status (part-time, full-time, self-employed etc), existing debts (credit cards, loans, other mortgages etc.), your credit score – and your debt to income ratio.
How much you earn will contribute to the affordability of monthly payments in the proposed home loan mortgage. Lenders usually assess this based on your income and proposed mortgage payments combined with other ongoing debts. However, there is no fixed benchmark and each lender can apply their own affordability judgement.
How many times my salary can I borrow for a mortgage?
There is no fixed rule that says you can only borrow so many times your annual income. However, the general advice is for homebuyers to not take out a mortgage more than x6 their household income. Thus, if two adults living together earned £25,000 per year, making a household income of £50,000, they should not opt for a mortgage above £300,000.
This is general guidance and could be contested in either direction.
Should I trust a mortgage calculator?
A mortgage calculator uses generic information to provide projected payments and a rough idea of what you can get. But these mortgage calculators are only based on 51% of applicants so almost half of the people using them will be offered a different payment arrangement.
How much can I borrow – home loan finance
How does borrowing against equity work?
As someone gradually pays their mortgage over time, they start owning a larger percentage of their home outright. This is known as home equity, calculated by subtracting their existing mortgage from their current property’s value (and then translated into a percentage).
If you have £100,000 home equity, you can borrow against some of this through a type of home loan designed for this purpose. Some examples include home equity loans, HELOCs, second charge mortgages and some home improvement loans. If you fail to repay you run the risk of losing your home.
How much you could borrow with a refinance home loan
Most lenders will allow you to borrow up to a maximum of around 80% of your home equity. So, if you had £100,000 equity you may be able to get an £80,000 home loan. The exact amount you could borrow will be based on available home equity, your annual income and personal finances.
How much can I borrow – home loan equity release
How does home loan equity release work?
Home equity release is an option for seniors who own their home without an existing debt attached, meaning they already paid back their home loan mortgage. They can release equity they have in their home as a lump sum payment by choosing an equity release product.
This ultimately “sells” the home to the lender but allows them to keep living in it until death. The most common example of this is a lifetime mortgage, also known as a reverse mortgage. Typically, this is done to make retirement more comfortable or to financially help family members earlier.
How much you could borrow with an equity release home loan
With an equity release product, you may be able to get around 80-90% of the property value paid out. Some lenders might even offer 100% home equity if they feel the property is almost certain to surge in value over time.
More home loan FAQs answered!
Additional home loan information – in all its definitions – can be found on our website. We’re answering the most common questions on mortgages, refinancing and equity release without confusing jargon.
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