The full explanation
It comes down to two things
People overthink how much they can afford. Strip it back to first principles and the bank is only asking two questions.
Do you have enough money to complete the purchase? And can you afford the loan?
I call them two gates. Every home loan has to get through both.
The part that surprises people is that getting through one gate doesn't get you through the other. You can have all the deposit in the world, but if the income isn't there, you're capped by what you can afford to repay. Saving more usually won't change that.
It works the other way too. A strong income with a small deposit can get stuck at the first gate, however comfortably the repayments would fit.
So the first job is working out which gate is the bottleneck. It might be one, both or neither. Once we know that, every other term you've heard slots in under one of the two.
An animated house races in and brakes at gate one, then the camera pulls back to show gate two; the gates are labelled the money and the loan. Riding a big deposit, the house passes gate one and bounces off gate two, marked low income. With a big income and a small deposit it bounces off gate one instead, while gate two stands wide open. A stream of dots then queues at the narrower gate, which is circled and stamped bottleneck.
Gate one: the money
The bank looks at your deposit through the loan-to-value ratio, or LVR. In normal English, that's how much they're lending compared to what the property is worth.
Their thinking is simple. If the repayments stop, they sell the property to get their money back, so the less they've lent against its value, the safer they feel.
Once a lender goes past 80% of the value, most will charge lenders mortgage insurance. It's a policy that protects the lender, not you, for the privilege of them taking a higher-risk loan. You pay for it, but it's often added to the loan rather than paid in cash. That's where the old advice about needing 20% comes from.
Then the costs sit on top: stamp duty, legal fees, inspections and the rest. The cash you actually need is the gap between what the bank lends and the full cost of buying, so the same deposit percentage can mean very different amounts of cash.
Stamp duty is charged in brackets, and depending on your state and eligibility, concessions can stop at a price threshold. Which side of that line a price lands on can change the cash you need by a lot, so it's one of the first things I check when we look at a price range.
Most government schemes and grants work on this gate. They lower the cash you need, and some let eligible buyers skip LMI because the government stands behind part of the loan instead. They don't change what the bank thinks you can afford, so you still have to get through gate two.
Help to Buy is the partial exception. The government buys a share of the home with you, so the loan you have to service is smaller, but that loan still has to get through gate two. Income caps, price caps and other eligibility rules apply.
If it's your first home, the first home buyer walkthrough goes through the schemes one at a time.
The property is drawn as a container. The bank's loan fills it to an 80% line and the deposit drops in on top, next to the formula LVR equals loan divided by value. When the loan rises past 80% the extra turns red and is stamped LMI, while a shield covers a bank marked protects the lender and a rain cloud hangs over the house, marked not you. Stamp duty, legals and inspections drop onto the deposit as blocks, bracketed as the cash to complete. Stamp duty becomes a staircase the house climbs until it has to leap a big step at a concession threshold, noting that rules vary by state. A scheme shield opens gate one while gate two stays shut under a question mark. For Help to Buy, a government share slides into the property, the loan block shrinks and gate two opens wider. Proportions are illustrative and not to scale.
Gate two: the loan
This one isn't rocket science. Take your income after tax, minus your expenses, minus your debts. Whatever's left over is what can go towards a loan repayment.
The question is simple. The nuance is that every bank has its own policy on how it counts each part, which is why one bank can lend you quite a different amount to another. That nuance is my job to worry about.
The bank also doesn't test you at the rate you'll actually pay. It adds a buffer of a few percentage points and checks you could still make the repayments at that higher rate. That's how "I can afford this" and "the bank says no" can both be true.
Expenses have a floor. Banks keep a minimum benchmark for living costs based on your household and income, and if your own estimate comes in underneath it, they use the benchmark anyway. Cutting back on a few things before you apply usually doesn't move it much.
Debts are where a lot of borrowing power goes. A car loan, a personal loan or even an unused credit card limit gets counted as a repayment. Closing a card you don't need, or cutting its limit, usually costs you nothing. Paying out a car or personal loan does use savings, but when the loan side is the one that's stuck, it can do more than adding the same money to the deposit.
How you're paid matters too. A permanent salary is simple to use. Casual, contract or self-employed income usually needs some history, and different banks treat it differently.
Income, expenses, debts and what's left are shown as a waterfall chart, with what's left paying the loan. The house clears a low hurdle marked your rate but clips a higher one marked test rate, raised by the buffer. A press squashes the expenses block until it hits a striped floor marked the bank's floor, while a dashed outline shows a lower estimate. A card limit with a zero balance is snipped in half, and what's left grows past the test repayment, marked more room. Salary is marked simple, while casual and self-employed income build a track record page by page. Proportions are illustrative and not to scale.
The lower ceiling wins
Put the two gates together and you get two ceilings: the most your cash can cover, and the most your income can service. The price you can reach stops at whichever one is lower.
That's why saving harder doesn't always help. If income is the cap, extra savings only add to the price about one for one. They don't unlock any more borrowing, because that's an income thing.
So the effort has to go on the gate that's actually stuck. More income, fewer debts or a lender whose policy suits you moves the loan side. Savings, a gift or a scheme moves the money side, and shared equity like Help to Buy can shrink the loan itself.
Fix one gate and the other can become the new ceiling, which is why I look at both together.
Family help is a good example of the difference. If parents give you money, that's money you don't need to borrow. If they go guarantor instead, it can stand in for a deposit, but you still have to service the whole loan.
The two gates become two ceilings: what your cash covers and what your income services. The house rides a scissor lift up and bumps into the lower one, stamped lower one wins. Three coins of savings raise the cash ceiling a long way but lift the house only by the coins, marked one for one. A lever beside the stuck gate, with more income, fewer debts and a lender that fits, is pulled; the income ceiling shoots up and the house rises until the cash ceiling becomes the new ceiling. Finally a gift shrinks the loan block, while a guarantor's shield leaves the whole loan to repay. Proportions are illustrative and not to scale.
Numbers last, on purpose
This is the order I use in a strategy session. First your situation in your own words, then whichever pieces of all this are still missing, and only then the numbers. Once you understand what impacts what, the numbers make a lot more sense.
Then we work out which gate is doing the limiting and talk in ranges rather than one number: what feels comfortable, a conservative maximum, and what would be pushing it. We can also start from a repayment you're happy with and work backwards, because the most a bank will lend isn't always the right number for you.
You leave knowing which gate we're working on, a price range you've chosen and a bit of homework. What you do next is up to you.
Numbers swirl around until they are pulled to the last of three stops on a road: your situation, how it works and the numbers. A range bar fills in three zones, comfortable, conservative maximum and pushing it, and the house settles short of pushing it. A checklist ticks off your gate, your price range and your next step, beside the house with its door lit. The explainer ends on both gates open, the house between them and the Raynor Lending Solutions name.