How Much Can You Borrow?

By Tax&Facts | Published on Feb 4, 2025 | Read: 3 Mins

Whether you're eyeing your dream home or considering a personal loan for a big purchase, one of the first questions that comes to mind is: How much can I actually afford to borrow?

Enter the Borrowing Capacity Tool — a simple yet powerful calculator that helps you estimate the maximum loan you can secure based on your budget. All it takes is a few inputs: your affordable monthly payment, the loan term (in years), and the interest rate. With these details, the tool does the math and tells you the loan amount you could reasonably handle.

How Does It Work?

At its core, the Borrowing Capacity Tool uses a standard financial formula called the loan amortization formula. This formula calculates how much you can borrow (also known as the present value) given:

• A fixed monthly payment (what you’re comfortable paying each month)
• A loan term (how many years you plan to take to repay it)
• An interest rate (annual percentage rate, usually offered by a bank or lender)

The Inputs

Here’s what the tool needs from you:

• Monthly Payment: The amount you can afford to pay every month. Be honest with yourself here—include your other monthly expenses to make sure this number is realistic.
• Loan Term (Years): Typical home loans are 15, 20, or 30 years. For personal loans, the term might be shorter.
• Interest Rate: The annual interest rate offered by the lender. This should reflect current market conditions or what your bank is offering.

For example, if you can afford to pay $1,000 per month, you're planning a 20-year loan, and the interest rate is 5% annually, the tool will tell you that you can borrow approximately $152,943.

Why Is This Useful?

This tool gives you a realistic picture of your financial boundaries before you start shopping for homes or comparing loan offers. It helps you avoid the common pitfall of overborrowing—stretching your finances too thin and risking default.

Additionally, it empowers you to:

• Compare different loan terms and interest rates
• Prepare for meetings with lenders
• Understand how much house or asset you can actually afford

Final Thoughts

Financial decisions, especially involving large sums like a mortgage or personal loan, can feel overwhelming. Tools like the Borrowing Capacity Calculator simplify that complexity. With just a few numbers, you gain clarity, confidence, and control over your borrowing power.

So before you fall in love with that house on the hill or start planning a major renovation, try the tool. It might be the most valuable 60 seconds you spend on your financial journey.