How Much Can I Borrow? Understanding Your Borrowing Capacity

One of the first questions anyone asks when thinking about buying property is: how much can I actually borrow? It’s a deceptively complex question. Two people with the same income can have very different borrowing capacities depending on their financial commitments, credit history, and the lender they approach.

How Lenders Calculate Borrowing Capacity

At a high level, lenders assess whether you can comfortably service (make repayments on) a loan. They look at your income, subtract your committed expenses and estimated living costs, and determine how much surplus is available to meet mortgage repayments — plus a buffer.

That buffer is important. Lenders don’t assess your capacity at the actual loan rate. They use a serviceability buffer of at least 3% above the loan rate (required by APRA). So if you’re borrowing at 6%, your capacity is assessed at 9%. This is designed to ensure you can still make repayments if rates rise.

Income Assessment: What Counts and What Doesn’t

Most lenders will count the following as assessable income:

• PAYG salary (base pay, usually 100%)
• Overtime, bonuses, and commissions (often at 50–80%, averaged over 2 years)
• Rental income (typically at 70–80% of gross rental)
• Business income for self-employed applicants (requires 2 years of tax returns)
• Government benefits (some, depending on lender)

What lenders are cautious about: casual income (without a demonstrated track record), income from a new job (less than 6–12 months), and income that isn’t documentable.

The HEM Benchmark

When assessing your living expenses, lenders don’t just take your word for it. They benchmark your declared expenses against the Household Expenditure Measure (HEM) — a statistical measure of minimum household spending for a given family size and income level.

If your declared expenses are below HEM, the lender will use HEM instead. If your declared expenses are higher, they’ll use your actual figure. This means even if you’re an extremely frugal household, your assessed expenses won’t fall below a certain floor — which can feel frustrating if you genuinely live on less.

Post-2019 royal commission, lenders have tightened their expense verification considerably. Expect to have your bank statements reviewed, and expenses like subscriptions, dining, and discretionary spending scrutinised.

The Impact of Credit Cards and BNPL

This catches a lot of borrowers off guard. Lenders assess credit card limits — not just balances — as a committed liability. A credit card with a $15,000 limit is assessed as if you owe $15,000 and are making minimum monthly repayments, regardless of whether the card is paid in full each month.

On a $15,000 credit card limit, the assessed monthly liability might be $450–$600/month. Multiplied across the loan term, that can reduce your borrowing capacity by $80,000–$100,000 on some lenders’ models.

Buy Now Pay Later services (Afterpay, Zip, etc.) are increasingly being treated similarly. Some lenders factor in BNPL commitments as liabilities even if the balances are small, because they indicate a pattern of spending behaviour.

If you have unused credit cards or BNPL accounts you don’t regularly use, closing them before applying can meaningfully improve your borrowing capacity.

Other Liabilities That Reduce Capacity

• Personal loans and car loans
• HECS/HELP debt (assessed as a percentage deduction from gross income)
• Existing mortgage repayments (if refinancing or buying an investment)
• Maintenance or child support obligations

How to Improve Your Borrowing Capacity

The most effective levers, in rough order of impact:

• Reduce or close credit cards and BNPL accounts you don’t need — especially high-limit cards
• Pay down personal loan and car loan balances before applying
• Increase your genuine savings — a larger deposit reduces the loan required
• Document all income sources properly — casual or self-employed income needs a paper trail
• Delay large new credit applications in the months before you apply for a mortgage

Lenders Vary More Than You’d Think

Different lenders use different models, and borrowing capacity can vary by $100,000 or more for the same applicant depending on which lender you approach. This is one of the key reasons a mortgage broker adds value — they know which lenders will assess your income generously, which penalise certain liabilities less heavily, and which are currently more competitive for your profile.

Before you start attending open homes, get a pre-assessment from a broker. Knowing your actual borrowing capacity — not a rough online calculator figure — means you can search with confidence and move quickly when the right property comes up.

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This article contains general information only and does not constitute financial or credit advice. Please speak with a qualified mortgage broker to discuss your individual circumstances.