1. What is the Borrowing Power Calculation?

The Bank Australia borrowing power calculation estimates how much you may be able to borrow based on your income, expenses, debt-to-income ratio, and current interest rates. It helps potential borrowers understand their likely loan capacity before applying.

2. How Does the Calculator Work?

The calculator uses the borrowing power formula:

Where:

• \( I \) — Annual income (AUD)
• \( E \) — Annual expenses (AUD)
• \( F \) — Debt-to-income ratio factor (typically 5-6)
• \( R \) — Annual interest rate (as decimal)
• \( BP \) — Borrowing power (AUD)

Explanation: The equation calculates disposable income (income minus expenses), multiplies by a factor representing how much debt you can service, then divides by the interest rate to determine loan capacity.

3. Importance of Borrowing Power

Details: Understanding your borrowing power helps set realistic property price ranges, improves loan application success rates, and assists with financial planning.

4. Using the Calculator

Tips: Enter all values in AUD. For most accurate results, use net (after-tax) income figures and include all regular expenses. The debt-to-income factor typically ranges from 5-6 (higher for stronger financial positions).

5. Frequently Asked Questions (FAQ)

Q1: Why does the debt-to-income factor range from 5-6?
A: This represents the typical multiplier banks use to convert annual disposable income to total loan capacity, accounting for living costs and buffers.

Q2: How accurate is this estimate?
A: This provides a general indication. Actual loan amounts may vary based on credit history, assets, liabilities, and lender policies.

Q3: Should I use gross or net income?
A: For most accurate results, use net (after-tax) income as this reflects your actual disposable income.

Q4: What expenses should I include?
A: Include all regular living expenses: housing, utilities, groceries, transport, insurance, entertainment, and existing loan repayments.

Q5: How often should I recalculate?
A: Recalculate whenever your financial situation changes significantly or when interest rates move by 0.5% or more.