Learn how lenders calculate borrowing capacity and what factors impact how much you can borrow for a home loan.
Understanding your borrowing capacity is essential before starting your property search. Lenders assess multiple factors—income, expenses, debts, dependents—to determine the maximum loan they'll approve. This figure can vary significantly between lenders and may surprise you. Here's how to calculate and maximize your borrowing power.
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Lenders use: (Net Income - Living Expenses - Debt Commitments) x Serviceability Buffer. Net income includes salary, rental income (80% counted), and some investment income. Living expenses are either your declared expenses or the HEM (Household Expenditure Measure) benchmark. Debt commitments include credit cards (calculated at 3% of limit monthly), personal loans, and HECS-HELP.
PAYG employees: lenders use your base salary plus guaranteed overtime/allowances (typically 80% counted). Self-employed: average of last 2 years' tax returns, sometimes requiring ABN registration for 2+ years. Casual/contract: 6-12 months payslips showing consistent earnings. Bonuses, commissions, and rental income are partially counted (50-80%). Multiple income sources boost capacity.
Lenders use the higher of your declared expenses or the HEM benchmark (roughly $2,000-$3,000+ monthly for singles, $3,000-$5,000+ for families). The HEM increases with dependents. If your actual expenses exceed HEM, lenders use your figures. Lowering expenses (cancel subscriptions, reduce discretionary spending) immediately increases borrowing capacity.
Credit card limits severely impact capacity. A $10,000 limit reduces borrowing by $30,000-$40,000, even with zero balance. Lenders calculate potential maximum monthly repayment (3% of limit). Close unused cards and reduce limits to what you actually use. Personal loans and car loans are assessed at their actual monthly repayments.
Lenders don't assess at the actual interest rate (6.5%). They add a buffer—testing your ability to service the loan at 8-9%. This ensures you can still afford repayments if rates rise. Some lenders use 3% buffers, others 3.5%. This buffer significantly reduces borrowing capacity compared to "what you could afford" at current rates.
Larger deposit (lower LVR), higher income, lower expenses, fewer debts, no dependents, strong employment history, excellent credit score. Some lenders offer higher capacities for professionals (doctors, lawyers, accountants). Having a guarantor also increases capacity or allows borrowing more than 80% without LMI.
As a rough guide, expect to borrow 4-6 times your gross annual income, depending on circumstances. A $100,000 salary might support $400,000-$600,000 borrowing. Combined income of $150,000 could support $600,000-$900,000. Use online calculators for estimates, but know that lenders' actual assessments vary significantly.
Borrowing capacity varies between lenders and depends on your complete financial picture. Before house hunting, get pre-approval from a mortgage broker who can assess your capacity across multiple lenders. To maximize capacity: increase income, reduce expenses, pay down debt, close unused credit cards, and maintain good employment history. Small changes can boost borrowing by tens of thousands.
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