How Much Can You Borrow? Calculating Borrowing Capacity from Income and Monthly Payment

There are two ways to work out borrowing capacity

There are broadly two ways to find out how much you can borrow. The answer changes depending on which you start from, so the safe approach is to calculate both and go with the lower.

• Work back from what you can pay each month: use your actual household budget to decide an amount you can afford per month, then find the loan amount from it. This gives a figure that fits your life.
• Use income and the debt-to-income ratio: set a ceiling on annual repayments as a share of annual income (the debt-to-income ratio). This is close to how lenders screen applications.

The first is what you can repay; the second is what you can borrow. The second is usually larger, so searching for a property based on it makes your budget tight.

Work back from what you can pay each month

Once you've settled the monthly payment, you can apply the rate and term to work back to the loan amount. These are guide figures for equal-payment repayment with no bonus payments.

Even at the same ¥100,000 a month, there's a ¥5.86 million gap between rates of 0.5% and 1.5%. Cutting the term from 35 years to 25 lowers the amount by ¥8.89 million. So even if what you can pay each month is unchanged, the price range you can buy in shifts a lot with the terms.

Use income and the debt-to-income ratio

The debt-to-income ratio is annual repayments as a share of annual income. In screening, 25–35% is a common guide. Here's what you can borrow by income at 1.0% over 35 years.

Raising the ratio from 25% to 35% increases the guide loan amount by 40%. But the ratio is a share of pre-tax income, so the real burden on your take-home pay is heavier. At ¥5 million income and a 35% ratio, you'd be paying ¥145,833 every month for 35 years.

The debt-to-income calculation also includes borrowing other than the mortgage. If you're repaying a car loan, revolving credit card debt or student loans, the room for your mortgage shrinks by those annual repayments.

The screening rate, an invisible wall

Rather than the rate they'd actually apply, lenders may judge the debt-to-income ratio using a higher rate that allows for future rises (the screening rate). Levels of about 3.0–4.0% are common.

With the same payment, calculating at the screening rate shrinks the loan amount by nearly 30%. If a pre-screening comes back lower than you expected, this gap is often the reason. Seen the other way, an amount that passes at the screening rate is an amount you could still repay if rates rose to 3%.

Separate "what you can borrow" from "what you can repay"

The amount that passes screening isn't the upper limit of what you can repay. Screening doesn't look at the following expenses, but they'll certainly affect your budget.

• Education costs: when children enter high school and university, spending on the order of ¥1 million a year piles up.
• Home upkeep: fixed asset tax, repairs, and condominium management fees and repair reserves. Reserves generally rise as the years pass.
• Upfront costs: processing fee (about 2.2% of the loan), registration, fire insurance and so on. For a ¥30 million loan, set aside around ¥1 million separately.
• Income changes: maternity and childcare leave, job changes, age-based pay cuts and the like. It's not unusual for income to fall at some point over 35 years.

Keeping repayments to 20–25% of take-home pay makes it easier to absorb such changes. At ¥5 million income (about ¥3.91 million take-home), that's a guide of about ¥65,000 to ¥81,000 a month. You can check your own take-home pay in how to calculate take-home pay. To see the impact of rising rates, see also interest rates and total repayment.

Work it out with the tool

1. 1

   Open the "Borrowing capacity" tab

   There's one section for working back from a monthly payment and another for working from annual income. Both share the same rate and repayment term.

2. 2

   Enter what you can pay each month

   Enter the amount you've settled on from your budget to get the principal you can borrow with that payment. A quick-reference table combining terms and rates appears at the same time.

3. 3

   Enter income and choose a debt-to-income ratio

   Enter your annual income and choose a ratio of 20%, 25%, 30% or 35% to get a guide monthly payment and the loan amount worked back from it.

4. 4

   Send the result to the payment tab

   You can send the resulting capacity straight to the "Calculate payment" tab. Check the total repayment, interest and repayment schedule to judge whether the amount is realistic.

To estimate at a screening rate, enter 3.0% in the rate field. You'll see how far the loan amount falls with the same monthly payment. For how the payment itself is calculated, see how to calculate loan payments, and for paying ahead once repayment has begun, see the effect of prepayment.

FAQ

How much can I borrow with a payment of ¥100,000 a month?

With equal-payment repayment and no bonus payments, a guide is about ¥35.42 million at 1.0% over 35 years, about ¥38.52 million at 0.5% over 35 years, and about ¥32.66 million at 1.5% over 35 years. Cutting the term to 25 years at 1.0% lowers it to about ¥26.53 million. The rate and term together can move it by close to ¥10 million, so settle the terms before calculating.

How many times my annual income can I borrow?

It depends on the debt-to-income ratio and the rate. At 1.0% over 35 years, the calculated ceiling is about 7.4 times income at a 25% ratio and about 10.3 times at 35%. The old "5 times income" guide dates from when rates were high, and low rates produce larger multiples. But what you can borrow and what you can comfortably repay are different, so checking repayments as a share of take-home pay is closer to reality.

What debt-to-income ratio is safe?

Screening uses 25–35% as a guide, but that's a share of pre-tax income. In take-home terms, the same 35% can be about 45%, which leaves little room for education and upkeep costs. Keeping repayments to 20–25% of take-home pay makes it easier to absorb income changes and rate rises.

Can I borrow less than the pre-screening amount?

Yes. The pre-screening result is a ceiling, and you have no obligation to borrow that much. Borrowing less lowers both the monthly payment and the total repayment. If you push up the property price based on the approved amount, you'll have no margin when rates rise or income falls, so it's safer to anchor on the amount you decided from your budget.

How much of a down payment do I need?

Loans with no down payment are common, but the larger loan increases total repayment. Borrowing ¥30 million over 35 years at 1.0% costs about ¥5.56 million in interest; putting ¥5 million down to borrow ¥25 million costs about ¥4.64 million, a ¥920,000 difference. Still, avoid using up all your cash: decide within what's left after upfront costs and an emergency fund.