How Do Banks Calculate Borrowing Power? A 2025 Guide for First Home Buyers and Investors in Australia

Buying your first home or investing in property is exciting, but understanding how lenders decide your borrowing capacity can be confusing. This comprehensive guide demystifies how Australian banks and lenders assess your income, expenses, and overall borrowing power. We’ll also compare different lender types (major banks, non-banks, credit unions) and share tips to improve your borrowing capacity.

In this guide: We’ll explain lender servicing calculator criteria – the internal formulas and benchmarks banks use to calculate borrowing power – including how various income types are treated, what living expense benchmarks like HEM (Household Expenditure Measure) mean, and how factors like interest rate buffers and loan types affect your borrowing capacity assessment in Australia. We’ll also compare major banks vs non-bank lenders vs credit unions (pros and cons) and answer frequently asked questions. By the end, you’ll understand how home loan expense assessment works and be better prepared to get your loan approved. Let’s dive in!

💡 Tip: If you ever feel overwhelmed or need personalized guidance, remember you don’t have to navigate this alone. Contact a Fundd broker for free expert help on maximising your borrowing power and finding the right loan options for your situation._

What is Borrowing Capacity and Why It Varies

Borrowing capacity (or “borrowing power”) is the maximum loan amount a lender is willing to offer you based on your financial situation. It’s essentially how much you can afford to borrow for a home loan given your income, expenses, and debts. Every lender has its own serviceability calculator to assess this, so your borrowing limit can vary from one lender to another. In fact, the difference can be significant – one major bank might lend you, say, $355k on your salary while another might offer $365k or more. This is because each lender uses unique criteria and assumptions (for example, different expense benchmarks or income weightings).

Key factors that determine borrowing capacity:

• Income: How much you earn (and the stability of that income). This includes your salary and any other sources like bonuses, overtime, self-employment income, investment income, or government benefits.
• Expenses: Your cost of living and financial commitments. Lenders look at your declared living expenses (and often compare against benchmarks like HEM) plus other obligations like existing loan repayments, credit card bills, rent, childcare, etc..
• Debts and liabilities: Any existing loans (car loans, personal loans), credit card limits (yes, even if you owe nothing, a credit card with a $10k limit might be treated as a $300 monthly liability), buy-now-pay-later accounts, and other ongoing commitments are factored in.
• Interest rates & buffers: Lenders don’t assess your capacity at the actual interest rate of your loan – they add a buffer (e.g. 3% extra) or use a conservative floor rate to ensure you could still repay if rates rise. Higher assumed rates mean lower borrowing capacity.
• Loan details: The loan term and type affect the calculation. A longer term (e.g. 30 years) means lower monthly payments, improving capacity. An interest-only loan might sound cheaper initially, but lenders often assess it more strictly (explained later). If it’s an investment loan vs owner-occupied, or if you have multiple properties, that can also influence calculations.
• Household size and dependents: More dependents (e.g. children) increase your living expense estimates under HEM, reducing how much spare income you’re deemed to have. If you have a partner or spouse, lenders may include their expenses too (even if they’re not on the loan) unless you can show they support themselves.
• Credit history: While your credit score doesn’t directly go into a servicing formula, it’s a crucial part of loan approval. A good credit history can expand your lender options (some lenders won’t approve low scores regardless of income), whereas a poor history might limit you to specialist lenders (often with stricter criteria or higher rates). Essentially, character and creditworthiness form another “C” that banks consider alongside capacity.

Each lender weighs these factors a bit differently. Most banks follow similar principles in calculating borrowing power – income minus expenses (including new loan payments) must leave a positive surplus each month. But the devil is in the details of how income and expenses are measured. Let’s break down exactly how lenders assess your income and outgoings.

How Lenders Assess Your Income (and How Much of It “Counts”)

Your income is the starting point for serviceability. Lenders will verify all income sources and often apply “shading” or discounts to certain types of income to account for risk or variability. It’s important to know how different forms of income are treated:

Primary Salary or Wages (PAYG Employment)

If you’re a salaried employee (full-time or part-time permanent), lenders typically take 100% of your base salary as income. You’ll need to provide recent payslips (usually 2–3 most recent payslips) and sometimes your latest Payment Summary or tax return to verify this. The key factors are:

• Length of employment: Being in your job for at least 6–12 months is ideal (or 2+ years in the same industry if recently changed jobs). Some lenders are okay with probation or shorter tenure if other aspects are strong, but stability helps.
• Full-time vs part-time vs casual: Full-time and permanent part-time income is viewed as stable. If you’re part-time, they’ll annualise your earnings based on contracted hours. Casual income can be accepted if you have a solid history (e.g. 12+ months continuous), but some banks may take a conservative view or average it over a longer period.
• Second jobs: Income from a second job may be counted if it’s regular and you’ve been doing it for a while (often 6–12 months). Lenders will want to ensure you aren’t overextending yourself time-wise as well.

Verification: Typically via computerised payslips (must show your name, employer, ABN, YTD income) and possibly an employment letter or bank statements showing salary credits. Many lenders also cross-check your income with your tax documents or through services like Income Tax Portal to ensure consistency.

Bonuses, Overtime, Commissions and Allowances (Variable Income)

Many people earn more than just their base wage – through overtime hours, performance bonuses, sales commissions, shift loadings, or various allowances (e.g. car allowance, travel allowance, etc.). Lenders do count these additional income sources, but often with shading (counting less than 100%) or stricter proof:

• Overtime: If overtime is a regular part of your job (common in industries like healthcare, emergency services, mining, etc.), many lenders will include it in income. However, they might only count 50–80% of your average overtime earnings. Some lenders are more generous (a few will use 100% of overtime for certain stable occupations or if you’ve earned it consistently for 6–12 months). Generally, you need a track record (payslips showing overtime over at least 6 months) and sometimes a letter from your employer confirming it’s likely to continue.
• Bonuses and Commissions: These can fluctuate year to year, so lenders usually average them over the past 2 years. For example, if you earned a $20k bonus last year and $10k the year before, they might take $15k as usable annual bonus income. Also, a haircut often applies – e.g. only 80% of the averaged bonus is counted. Some lenders will take 100% if it’s very regular and confirmed by your employer. Again, providing your last 2 years’ PAYG summaries or tax returns helps substantiate this.
• Sales Commission: Treated similarly to bonuses – typically averaged over 2 years and shaded (often 80%). If you are a commission-based worker (like a real estate agent on a modest base + commission), note that a few specialty lenders or second-tier banks might consider 100% of your commission if you have strong history. This difference in policy can significantly impact borrowing power for those in commission-heavy roles.
• Allowances: Fixed allowances (like a car allowance, uniform allowance, shift allowance) are generally counted in full if they’re ongoing. For car allowances, some lenders might offset it against car expenses or lease payments rather than adding to income. Each allowance type might have specific treatment, but as a rule, if it’s on your payslip and consistent, it can be used. Just be ready to explain the nature of any unusual allowance.
• Shift loadings / penalties: These are common for nurses, police, etc. Lenders often treat them like overtime – requiring a history and possibly shading to 80% unless you’re in an essential services role. In fact, some lenders explicitly allow 100% of overtime for emergency service workers (firefighters, paramedics, etc.) on the logic that it’s regularly required.

Important: Lenders may require your employer to confirm these variable payments. For example, a letter stating “John has earned an annual bonus for the past 3 years and is likely to continue subject to performance” can strengthen your case. Without that, they may fall back to a conservative average or exclude large bonuses entirely if deemed one-off.

Example: You work in sales with a base salary of $60,000 and average commissions of $40,000 a year. Bank A might count 80% of that $40k as income (so $32k), effectively treating your total income as $92k for serviceability. Bank B, however, might only count 50% of commissions or require a 2-year average if last year was lower. That could reduce your assessed income by tens of thousands, leading Bank B to offer a much smaller loan. This is why understanding each lender’s servicing calculator criteria for income is crucial – or better yet, having a broker identify which lender will maximise your particular income profile.

Self-Employed Income (Business Owners & Contractors)

If you’re self-employed – whether a sole trader, company director, or contractor – lenders will assess your income based on your business’s financials. Typically, they require your last two years of tax returns (both personal and business) and sometimes profit-and-loss statements. They often take an average of the two years’ net profit (plus any salary or drawings you took), or in some cases the lower of the two years if your income fluctuated significantly. The goal is to determine a sustainable earnings level.

Key points for self-employed applicants:

• Income Averaging: Say your taxable income was $80k last year and $100k the year before. Many lenders would use $90k as your income. If the most recent year is much higher, some may still average (to be cautious), while a few might take the latest year if you can explain the jump (e.g. business grew and the higher income is here to stay). Some lenders cap the increase they’ll accept – e.g. if income jumped over 20%, they might only count up to a portion of that increase.
• Addbacks: Here’s some good news: certain expenses on your tax return can be “added back” to your income in the lender’s eyes because they are non-cash or discretionary. Common addbacks include depreciation, amortization, one-time business costs, and sometimes extra superannuation contributions. For example, if your net profit was $80k after deducting $10k of depreciation, a lender might add that $10k back, effectively treating your income as $90k for servicing. You’ll need to identify these from your financials – lenders usually scour your tax returns for any allowable addbacks.
• Company structure: If you operate a company and leave profit in the business (retained earnings), some lenders can even count that (or a portion of it) as income available to you, since you could have drawn it. This varies – many will only count what was actually paid to you (salary/dividends), but a few generous lenders consider retained profits or will accept an accountant’s letter stating the income the company could distribute.
• Documentation: Full financials (2 years) are standard for full-doc loans. There are also alt-doc loans (alternative documentation) offered by non-bank lenders where you can verify income via BAS statements, bank account statements showing income flows, or an accountant’s declaration. These are useful if your tax returns don’t reflect your current earning capacity (e.g. due to tax deductions). However, alt-doc loans often come with higher interest rates or lower max LVRs. Most first home buyers stick to full-doc, but property investors with complex finances might use alt-doc in some cases.

Because self-employed income is seen as less predictable, some lenders apply a shade (e.g. 80%) to self-employed income for servicing – but this is not universal. Many will use 100% of your verified average income (with addbacks) since they already averaged two years which provides some conservatism. The differences in how lenders interpret your financials can be huge. For example, one lender might not understand your business’s addbacks and only see $70k income, while another sees $100k. Working with a broker (or a savvy accountant) to present your income in the best light can make a big difference in borrowing capacity.

Investment Income (Rent, Dividends, etc.)

If you have existing investments, their income can be included – but again, often at a discounted rate to account for costs and volatility:

• Rental Income: Lenders typically include rent from investment properties you own, but usually only 80% of the gross rent is counted. The 20% haircut covers expenses like agent fees, insurance, repairs, or potential vacancy periods. Some conservative lenders even use 75% or 70% of rental income in their calculators, whereas a few might stretch to 100% if you have a very high rental yield (though that’s rare). If the property is positively geared, that net rent boosts your income; if it’s negatively geared (rental income is less than interest and outgoings), lenders may incorporate the loss as an expense instead. A few lenders do acknowledge negative gearing benefits by adding back some of your rental property’s tax loss (effectively crediting some tax savings to your income), but many simply take the 80% rent and ignore the tax refund. Overall, expect that not all your rental earnings will count – e.g. $20,000 annual rent might be treated as $16,000 for servicing.
• Airbnb or Holiday Letting: Income from short-term rental platforms is considered less stable. Lenders often shade this more heavily (only 50–70%) or require a longer history. For example, one policy might take only 70% of Airbnb income averaged over 12 months. If you’re house-hacking (renting a room) or have irregular rent, be prepared for a conservative approach.
• Dividends and Interest: Interest from bank accounts or dividends from shares can be included if substantial and consistent. Many lenders take 80% of investment income like dividends. They might require two years of tax returns to see the interest/dividend amounts and ensure it’s ongoing (especially if it’s from a family trust or investment portfolio). If you have a large share portfolio yielding $10k/year in dividends, a lender might count $8k of that towards your income.
• Other Investments: Distributions from managed funds or trusts, income from business investments, etc., are generally treated similarly to dividends – usable if you can prove a track record and likely continuation, with some haircuts applied.

For verification, you’d typically provide tax returns showing the rental income and expenses (and possibly a current rental statement or lease). For new property purchases, banks may allow use of proposed rent (from an appraisal or rental estimate) but often at a more conservative rate (they might discount the estimated rent or only count 80% of it as usual).

Tip: If you’re a property investor, note that each additional property adds both income (rent) and expense (its mortgage payments, rates, etc.). Lenders will include the new purchase’s rent in your income (shaded) but also account for the new loan’s repayments (with a buffer). The net effect can be complicated – sometimes a property that’s nearly self-funding won’t drastically change your capacity for the next one, but if it’s highly negatively geared, it could reduce your overall borrowing power. Some non-bank lenders are a bit more lenient on how multiple properties are treated (since APRA’s investor loan limits don’t apply to them), which is why serial investors often seek out those niches.

Government Benefits and Other Income

Various government payments can count as income, depending on the lender and the situation:

• Family Tax Benefit (FTB): Many lenders accept Family Tax Benefit Part A and B as income if you have young children. Often they require the children to be below a certain age (like under 11 or 12) and that the benefits will continue for some years. FTB is usually counted at 100% for servicing if accepted. You’ll need Centrelink statements showing your fortnightly payment amount.
• Pensions: Age pension, Veterans Affairs pension, or Disability Support Pension can be considered if you’re of age or permanently on it. Not all lenders accept these (especially as sole income for a home loan), but some do. They might take 100% of it if it’s your stable income source. Some lenders cap the loan-to-value ratio or have other conditions for pensioner borrowers (and of course, if you’re retired, they’ll scrutinize how you can repay the loan in the long term).
• Carer’s payments and other supplements: These can be considered supporting income. For example, a Carer’s Allowance or Parenting Payment might be accepted by certain lenders, often with conditions (e.g. child under a certain age, and usually paired with some other income).
• Child support: Some lenders will allow child support payments you receive to count as income, if it’s a formal agreement (e.g. assessed by the Child Support Agency) and there’s a proven track record of payment. You’ll likely need 3–6 months of bank statements showing the deposits, plus the legal agreement. When accepted, typically 100% is used since it’s effectively guaranteed by law, but a lender might have an age cut-off (they won’t count it if the child is, say, 16 or 17 because it will cease soon).
• Rental assistance or other welfare: Most other government benefits (JobSeeker, rent assistance, study allowances) are usually not counted as income for a home loan, or only in exceptional cases. Lenders consider these temporary or insufficient to support a mortgage.
• Superannuation Drawdown: If you’re retired and drawing an income from your super or investments, lenders can consider that. Regular withdrawals from super or an annuity/pension account would be treated like income (with evidence of the balance and sustainability). Some lenders have products for retirees (e.g. reverse mortgages or specialized loans that don’t rely on traditional income), but those are separate topics beyond this guide’s scope. (If you’re a retiree looking for options, see our guide on reverse mortgages for retirees – but for first home buyers and typical investors, we’ll stick to standard loans.)
• Foreign income: Earning income in a foreign currency (say you work overseas or get rental income from an overseas property) adds complexity. Many banks shade foreign income heavily (to around 80%) or may not accept it at all, especially if you can’t service the loan in AUD. They also often require it to be in a major currency (USD, GBP, EUR, etc.) and may adjust for exchange rate fluctuations. If you’re an Australian expat or earning part of your income abroad, there are banks that lend to expats, but criteria vary widely. Be prepared to provide tax returns and foreign payslips, and potentially an Australian accountant’s verification of your income.

Lastly, unacceptable income sources include things like one-off lump sums (lottery wins, one-time inheritances are great for your deposit but don’t count as ongoing income), compensation payouts, workers’ compensation or insurance payouts, speculative income (future investments or assets you haven’t sold), or income from non-verified sources (undocumented cash jobs). Lenders stick to income that is stable, regular, and can be evidenced on paper.

In summary, lenders will verify your income thoroughly – via payslips, tax returns, bank statements, Centrelink statements, etc. – and only count the portions that they deem reliable. Your job is to present your income in the best possible way. If you have multiple income streams, make sure to document each (even that side gig or rental income can boost borrowing power once properly evidenced). And remember, policies differ: one lender might ignore your bonus, while another could use most of it; one might average your business income, another might take the latest year if higher. This is a prime area where shopping around (or using a mortgage broker) pays off: matching your income profile to a lender’s criteria can significantly increase how much you’re allowed to borrow.

[📌 Cross-Reference: For a deeper dive on income and serviceability, you may check out our blog post “How to Buy Your First Home in Australia Using a Mortgage Broker” on our Resources page, which covers strategies like using variable incomes and choosing the right lender (this can be especially helpful if your income isn’t straightforward).]

How Lenders Assess Living Expenses (HEM Benchmarks vs Actual Spending)

After income, the flip side of the coin is your expenses. Lenders scrutinize your cost of living to ensure you can comfortably meet mortgage repayments on top of your everyday expenses. But how do they figure out what your expenses are? This is where declared expenses and the Household Expenditure Measure (HEM) come into play.

Declared Expenses: What You Tell the Bank

As part of your loan application, you’ll provide a breakdown of your living expenses. This usually covers categories such as: groceries, utilities, insurance, transportation, phone/internet, medical, childcare/school fees, entertainment, etc. (Lenders may use a detailed form requiring you to itemize all major spending areas.) It’s important to be truthful yet thoughtful here.

What to include: Generally, include your regular ongoing expenses that will continue after you buy the property. Things like food, utility bills, insurance premiums, childcare, and so on are ongoing and should be declared. If you’re buying an owner-occupied home and you currently pay rent, note that your current rent expense will typically be removed from the assessment (because once you have a mortgage, you won’t also be paying rent). However, if you’re buying an investment property and will still be renting your own home, your rent remains an expense to count.

What not to include as “living expenses”: Do not list your debt repayments (like credit card, personal loan payments) as part of living expenses – those are debts and will be counted separately by the lender. Listing them again in living costs would double count them. Also, avoid including truly one-off expenses. For example, if you spent $5,000 on a holiday or a new laptop last year, that’s not an ongoing monthly expense – it was a one-time cost. Don’t artificially inflate your regular expenses by including such items. The bank will look at your past statements, so they might see that big trip or wedding expense, but you can clarify it was a one-time event (not a recurring obligation).

Finally, if you have any unusually high but temporary expenses (say, you had two car insurance renewals fall in one month, or a medical bill), you can note that separately or discuss with your broker so the lender doesn’t assume that’s a normal monthly spend.

Household Expenditure Measure (HEM): The Minimum Benchmark

Australian banks rely heavily on the Household Expenditure Measure (HEM) as a floor for living expenses. HEM is a benchmark derived from the Australian Bureau of Statistics data on household spending. It provides an estimate of the minimum reasonable cost of living for different household sizes and situations. Factors like the number of adults, number of children, marital status, and sometimes income bands or location (capital city vs regional) feed into the HEM figure.

For example, HEM might say that a single adult in a city has a baseline living expense of, say, $1,500 per month, whereas a couple with two children might have a baseline of $4,000 per month (figures for illustration only). These figures include essentials like food, clothing, transport, healthcare, etc., and a modest allowance for discretionary spending. It excludes housing costs (rent or mortgage) and certain other costs like income taxes, which lenders treat separately.

How lenders use HEM: When you submit your declared expenses, the lender will compare them to their HEM benchmark for your household profile. In most cases, the bank will use whichever is higher: your declared expenses or the HEM benchmark. This means:

• If you report living expenses lower than HEM, the bank will likely still use the HEM number (assuming you might be underestimating or living too frugally on paper). For instance, if you claim you only spend $1,000 a month as a single person but HEM for a single is $1,500, they’ll use $1,500 in the calculation.
• If your declared expenses are higher than HEM, they’ll use your actual higher figure (since that presumably reflects your lifestyle). E.g., if HEM is $4,000 for your family but you truly spend $5,000, they’ll use $5,000 which reduces your borrowing capacity.

In essence, HEM acts as a minimum floor – lenders must ensure they’re allowing enough for you to live on. Regulators frowned upon banks that simply used HEM for everyone without checking actual expenses (a key issue raised in the 2018 Royal Commission). Today, banks must ask you about your actual spending and not just blindly rely on HEM if evidence suggests you spend more. Still, HEM is a convenient benchmark, and many people’s stated expenses end up being at or below HEM, which means the bank ends up using HEM by default in those cases.

HEM can vary slightly by lender – some use a slightly higher internal HEM for more buffer. That’s one reason why lender A’s calculator vs lender B’s can yield different results: if Lender B’s HEM for a couple with 2 kids is, say, $500/month higher than Lender A’s, then all else equal, Lender B will offer a smaller max loan.

To give a rough idea, HEM includes allowance for: basic necessities (food, utilities, transport) plus insurance, healthcare, education costs, and a bit of discretionary spending. But if you have additional expenses like private school fees or significant medical costs, those are on top of HEM – you need to declare them and the lender will add them to the base amount.

Living Expense Verification: Declared vs Actual

Given the importance of expenses in determining borrowing power, lenders will often verify your spending. How? By examining your bank statements and transaction history. It’s now common for lenders to ask for 3 to 6 months of bank statements for your main transaction account (and any credit card statements) to spot-check your spending habits. In fact, if you bank with the lender you’re applying to, they can see your account activity directly.

They’re looking for undisclosed expenses or inconsistencies. For example:

• Regular payments not listed on your application (did you forget a loan or a Afterpay installment? They’ll notice regular debits).
• Large expenses that don’t align with what you declared (if you said “I spend $500 on groceries” but your account shows frequent $200+ restaurant bills every week, that could raise questions).
• Signs of financial stress or risky spending (excessive gambling transactions, constantly overdrawn accounts – these can hurt your application).

Crucially, if you try to underestimate your expenses, the bank will likely catch on. They are obliged under responsible lending laws to ensure the loan is affordable for you, so they will err on the side of caution. It’s better to be upfront and sensible with your declared expenses than to claim an unrealistically low number that you can’t back up.

That said, you don’t want to overstate expenses either, because as noted, if you “accidentally” declare far more than you actually spend, you’re shooting yourself in the foot. For instance, we’ve seen cases where people included one-off expenditures or double-counted something, leading to a high declared expense figure that resulted in a loan decline – in such cases, a broker can intervene with evidence to clarify and sometimes get the decision reversed. But it’s best to avoid the hassle by getting it right the first time.

Tips for expense verification:

• Clean up your spending before applying: In the 3-6 months leading up to your application, try to moderate unnecessary discretionary spending. Lenders understand you might tighten your belt once you have a mortgage, but they can only go on what they see now. So, if possible, reduce extravagant or non-essential expenses temporarily. This doesn’t mean you can’t have any fun, but perhaps hold off on big luxury purchases or expensive hobbies in the immediate lead-up. It demonstrates financial discipline.
• Avoid red flags: Try not to let payments bounce, avoid going into overdraft, and definitely avoid gambling transactions visible on statements if you can (a friendly flutter is one thing, but regular betting transactions are a red flag for many lenders).
• Note any expense cuts: If you have expenses that will cease once you buy, make sure that’s clear. For example, “Currently paying $200/week rent, but will move into the purchased property so this cost goes away.” Lenders typically know to exclude current rent if you’re buying a home to live in. Similarly, if you have a lease or expense ending soon, mention it.
• Children and dependents: Ensure you count all dependents because the bank will assign a cost for each (via HEM). If your partner is not working and not going on the loan, note that lenders will still count them as a dependent unless you can prove they contribute financially. Some banks might let you use “single” living expense if the partner truly pays their own way (documented separately), but generally a non-earning spouse is viewed as someone you support.
• Joint accounts or debts: If you share expenses or debts with someone not on the loan, it can complicate things. Some lenders might assume you cover the full expense or debt, others might only count half (there’s even something called “common debt reducer” policy where a lender will take 50% of a joint debt if the other party isn’t an applicant). Be sure to discuss such situations so the lender doesn’t overestimate your liabilities.

Ultimately, lender home loan expense assessment is about ensuring you have enough free cashflow to comfortably repay the loan. They want to see that after paying your mortgage (at a higher test rate), you’d still be able to pay for groceries, utilities, insurance, kids’ school, and a reasonable amount of discretionary spending. The use of HEM means the bank will not accept unrealistically low expense estimates – they have a pretty good idea of what a household like yours should be spending at minimum.

So if you live very frugally below HEM, that’s fine but the lender may still use HEM. If you live above your means, that will definitely cap your borrowing until you rein things in. Many borrowers find they need to adjust their spending habits to meet a bank’s criteria – for example, cutting back on takeaway, subscriptions, or other non-essentials can not only help you save more for a deposit but also improve the picture of your affordability.

Bottom line: Be honest and accurate about your living expenses. Lenders will verify and use the higher of your stated expenses or the statistical benchmark (HEM). If your current spending is high, look for areas to trim, because high expenses directly reduce your borrowing capacity. If your spending is low, that’s great, but expect the bank to still apply at least a modest cost of living figure via HEM. The goal is to show that after paying all your expenses, you have sufficient buffer to handle the new loan payments.

(For more on budgeting and what costs to expect, you might explore our Ultimate 2025 Guide to First Home Buyer Grants and Schemes in Australia – it covers some cost considerations for first home buyers, which ties into planning your finances. Knowing what grants or assistance you might get can help offset expenses like stamp duty or LMI, indirectly improving your financial position.)

How Borrowing Power is Calculated: From Income Minus Expenses to Maximum Loan

Now that we know how income and expenses are assessed, let’s look at how lenders actually calculate borrowing power in practice. It’s essentially a big equation that determines whether you have surplus income to service a loan, and how large that loan can be.

Most lenders use a formula along the lines of:

Gross Income – (Tax + Existing Commitments + Living Expenses + New Loan Payments + Buffer) = Surplus.

They want this surplus to be positive (and ideally above a certain small buffer or percentage of income). If there’s a positive surplus, it means you can afford the loan. If it’s negative, the loan amount is too high for you. The maximum borrowing amount is found by tweaking the “New Loan Payments” part (which depends on loan size, interest rate, term) until the surplus is just above zero or at the required minimum.

Let’s break down each component of the calculation:

• Gross Income: This is your total verified monthly income before tax. All those income sources we covered (salary, rent, etc.), after any shading, are summed up. For example, suppose you have $8,000 gross income per month (that could be, say, $7k salary + $1k from a rental property after shading).
• Tax: Lenders account for income tax (and Medicare, etc.) because that reduces your take-home pay. Some lenders use actual tax figures from your payslip; others use standardized tax rates. In our example, tax on $8,000 might be $1,500 per month.
• Existing Commitments: These are all your current debt obligations. It includes things like:
  • Other loan repayments: e.g. a personal loan of $300/month.
  • Credit card payments: Even if you don’t owe anything, they factor a monthly cost for your credit card limits. Commonly they assume about 3% of the limit as a monthly expense. So if you have a $10,000 limit card, they count $300/month commitment for safety. (Some lenders use a slightly different formula or required minimum repayment amount, but ~3% is a rule of thumb.)
  • HECS/HELP (student loan) repayments: If you have a student debt, and you earn above the threshold, that yearly repayment (which is a percentage of income) is considered an ongoing commitment. Typically they either reduce your net income by that amount or add it as an expense. Either way, it will reduce borrowing capacity. Make sure to disclose any student loans – banks will see it on your credit file or in pay deductions.
  • Car leases, novated leases, or other financing: These are treated like loan repayments.
  • Rental commitments: If you will continue paying rent or board (like if the property you’re buying is an investment and you’ll still rent where you live), the monthly rent is an existing commitment.
  • Child support or alimony: If you legally must pay support, that outgoing is counted in your commitments.
  • Basically, any fixed financial obligations you have must be input. Lenders will check your liabilities on your credit report too (e.g. other mortgages, personal loans, etc. show up there).
• Living Expenses: As discussed, this will be either your declared expenses or the HEM benchmark (whichever is higher) for each month. In our example formula, living expenses might be $1,600 per month (let’s say that’s the HEM for your household).
• New Loan Payments: This is the expected monthly repayment on the proposed home loan, but calculated at the assessment rate, not the actual rate. If you’re looking to borrow $X, the lender will plug in an interest rate that includes their buffer (or floor rate). For instance, if the current product rate is 5%, they might assess at 8%. They also assume a certain loan term (usually 30 years for a new home loan, unless you explicitly want a shorter term). So if $X over 30 years at 8% interest gives a monthly payment of $2,200, that $2,200 goes into the formula.If you were requesting interest-only (IO) period on the loan, the assessment might be different: many banks will still calculate the payment on a principal & interest basis over the remaining term after IO. For example, a $500k loan, 5 years IO on 30-year term, at 8% assessment rate – instead of using a 30-year amortization, they use 25 years (since after 5 years of IO, you’d only have 25 years left to pay principal). This results in a higher theoretical payment, thus stricter test. A smaller IO period (like 1-2 years) means 28-29 year remaining term, which slightly reduces the hit to borrowing power compared to a full 5-year IO. The logic is to ensure you can afford the loan when principal repayments kick in. Some lenders even add an extra buffer for IO loans or limit the maximum LVR for IO, especially on investment loans. The takeaway: choosing interest-only can reduce your assessed borrowing capacity with many lenders. If your goal is maximising borrowing power, you often get a higher limit by opting for principal & interest from the start, unless you find a lender that still does IO assessment on IO payments (a few non-banks might).
• Buffer / Sensitivity Margin: Many lenders explicitly include a buffer in the formula – a margin for “what if costs increase.” APRA (the banking regulator) currently requires banks to add at least 3.0% to the loan’s interest rate when assessing serviceability. For example, they’ll test your loan repayments at, say, 8% instead of the 5% rate. This buffer is to ensure you could cope with rate rises. Some lenders also have a minimum floor rate (e.g. “assess at 7% or actual rate + 3%, whichever is higher”). In the high interest environment of 2023–2024, many banks had floor rates around 7-8% because actual rates + 3% soared above that.In calculation terms, the buffer is often built into the “New Loan Payments” figure (via the higher interest). Some lenders also add a small fixed monthly buffer like $100–$200 per application or per person, just as extra padding. In the Unloan example, they added a $500 buffer, which could represent miscellaneous unforeseen expenses or simply a cushion to ensure surplus isn’t just zero but has some breathing room.

  Existing loans: Note that any existing loans you have are also usually assessed at a buffered rate. So if you have a current mortgage on an investment property at 3% interest, the bank might calculate your ongoing repayment at 6% or so for serviceability purposes – meaning they’ll assume a higher outgoing than your actual on that debt. This can catch people by surprise: you might be paying $1,000/month on an existing loan, but the bank might count it as $1,300 in the assessment to be safe. This reduces your surplus income for a new loan.

• Surplus: After subtracting all those expenses and buffers from income, you get the monthly surplus (or deficit). For a loan to be approved, there generally needs to be a positive surplus. Some lenders require a specific minimum surplus (like at least $1 or $100 or a percentage of income). Others look at a Debt Service Ratio or Net Surplus Ratio, which is essentially (Income minus expenses) / income or / commitments, to ensure you have a bit of wiggle room.

If the surplus is negative, the loan amount is too high – the lender’s calculator will indicate you can’t afford that loan. If it’s positive, technically you pass serviceability. The size of the surplus doesn’t usually increase the loan amount beyond the minimum pass – it’s more pass/fail (though a very thin surplus might be a concern; under NCCP responsible lending, they might want to see you have more than just $1 left per month).

Calculating Maximum Loan: Lenders determine the maximum loan by iterating: they increase or decrease the loan amount until the surplus is just above zero. Many broker calculators will do this automatically. For a rough idea yourself, you can use online borrowing power calculators which essentially do this math. For instance, you input your income, expenses, etc., and it will output an estimated max loan. Just remember each bank’s result can differ.

Example Calculation: Let’s use the numbers from earlier to illustrate:

• Gross monthly income: $8,000
• Income tax: $1,500 (approx for that income)
• Existing commitments: $300 (say a car loan)
• Proposed loan repayments: $2,200 (this corresponds to a certain loan size at the assessment rate)
• Living expenses: $1,600 (based on HEM for this scenario)
• Buffer: $500

Now, subtracting all: $8,000 – ($1,500 + $300 + $2,200 + $1,600 + $500) = $1,900 surplus.

A $1,900 surplus monthly is healthy – it suggests this loan amount is affordable with room to spare. In fact, the bank might say you could even borrow more until that surplus shrinks to near zero. If we increase the loan (thus $2,200 payment becomes higher), surplus will drop. The maximum loan is when surplus is just above zero (or at the required min).

Different lenders might also require that surplus to be e.g. at least 0 or a certain ratio. But the core idea: borrowing capacity is reached when your income just covers all your expenses and loan repayments with the mandated buffers.

This is why reducing any expense or liability boosts capacity, and increasing income or choosing a longer loan term boosts capacity – they all affect that equation. Conversely, higher interest rates or bigger expenses shrink capacity.

Major Factors that Can Change Your Borrowing Calculation:

1. Interest Rate Changes: When interest rates rise, assessment rates rise in tandem (since the buffer is on top of the actual). For example, the series of RBA rate hikes in 2022–2023 dramatically reduced borrowing capacity – borrowers saw 5–10% drops in max loan for each 0.5% increase in rates, roughly. Currently, with rates higher, borrowing power is notably lower than a couple years ago. Keep this in mind if you’re pre-approved – if rates go up, your pre-approved amount might be scaled back unless your income also increased.
2. Loan Term: A 30-year term yields lower monthly payments than a 25-year term, thus allowing more borrowing. Most first home loans default to 30 years. If you for some reason wanted a shorter term, know that it will tighten the capacity. For investors or upgrader scenarios, sometimes extending interest-only or resetting a 30-year term on refinance can increase borrowing capacity artificially (though paying a loan over a longer period means more interest in total).
3. Repayment Type (P&I vs IO): As discussed, interest-only loans are assessed with higher payments later, which can reduce capacity. Some lenders that cater to investors might still have more lenient IO treatment, but APRA-regulated banks generally don’t give an advantage for IO nowadays.
4. Number of Dependents: If you have another child or take on a dependent, HEM goes up and borrowing power goes down. Lenders typically count an unborn child (if you’re expecting) once they know about it, so that can also change things. Additionally, if planning a family, note that going on maternity leave (temporary reduced income) could impact an application in progress – lenders might ask how you’ll afford the loan on one income.
5. Location and Property-related costs: For owner-occupied, property-related costs aren’t explicitly in the servicing calc except insurances and rates usually come out of your general living expenses. For investment properties, lenders often add an estimate for property expenses like council rates, insurance, maintenance. Some simply assume the 20% rental haircut covers that, others might explicitly input an annual expense amount (which effectively reduces the net rent). Not a huge factor, but worth noting.
6. Lender’s required buffers or additional margins: We covered the interest buffer. Occasionally, in certain situations, a lender might manually require extra buffer (for example, if you’re close to their credit policy limits or have a higher risk profile, they could internally want more surplus). But that’s case-by-case and not transparent.

Comparing Lenders’ Borrowing Capacity

It bears repeating: Not all lenders will offer the same borrowing capacity. Aside from differences in HEM or income treatment, there are subtle policy differences:

• Some banks are comfortable with higher debt-to-income (DTI) ratios than others. Many have a policy cap (e.g. they might not lend if your total debts exceed 6 or 7 times your gross income). This can be a limiting factor if you’re trying to borrow at the edge. If one lender has a strict DTI cap of 6 and another can go to 9, the latter could lend you significantly more (though DTI > 9 is generally rare).
• Each lender’s HEM table is proprietary and updated periodically. Some adjust their HEM higher for higher-income borrowers (assuming higher discretionary spending), while others use a flat figure regardless of income beyond a point.
• Different treatment of certain expenses or debts: For example, we mentioned “common debt reducer” – not all lenders will apportion joint debts 50/50, some count 100% against you. If you have, say, an investment loan jointly with someone else, one bank might say you’re fully liable for it (hurting your capacity) while another might say we’ll only count half since the co-owner presumably pays the other half. That can double your borrowing capacity in extreme cases where joint debts are involved.
• Negative gearing addbacks: A few lenders allow adding back a portion of negative gearing (like the tax savings from an investment property’s loss). This can improve serviceability for property investors. Others don’t consider it at all.
• Different buffers: As noted, ADIs (banks, credit unions) must use at least 3% buffer by APRA rules. Non-bank lenders (who aren’t under APRA) technically don’t have to. While most still use a buffer to meet responsible lending (ASIC expects it), some might use slightly less or have more flexibility if they really want to approve a loan. For instance, a non-bank could choose a 2% buffer, which would instantly allow borrowing a bit more – but they carry more risk in doing so. A word of caution: stretching to a lender with lower standards might get you a higher loan, but make sure you truly can afford it.
• Interest rate differential: If one lender offers you a much lower actual interest rate than another, your borrowing capacity with that lender could be a touch higher because the starting point for adding the 3% buffer is lower. For example, Lender A has 5% rate so assesses at ~8%, Lender B has 6% rate so assesses at ~9%. The higher assessment rate yields a lower capacity. However, differences in rate of a few decimals usually matter less than policy differences, since the 3% buffer kind of levels it out. Still, it can be one of several small factors.
• Minimum surplus requirements: Lender A might approve if surplus ≥ $1; Lender B might insist on $200 or more surplus. So you might pass one calculator and “fail” another even if both show positive, just due to that extra cushion requirement.

Given these differences, it’s not uncommon to see a scenario like: Major Bank X would lend $500k, whereas Non-Bank Y would lend $550k for the same borrower. Neither is “right” or “wrong” – it’s about their risk appetite and assumptions. This is why comparing lenders (or leveraging a broker’s knowledge) is crucial if you need to maximise borrowing power. Of course, you shouldn’t borrow more than you’re comfortable repaying, even if a lender is willing to offer it. Always consider your own budget and comfort level.

[📈 Insight: According to an analysis in early 2025, five different major lenders showed notable variations in borrowing capacity for the same income levels. For example, a $80,000 salary could qualify for around $354k at one bank versus $365k at another, and over $409k at a more aggressive lender. This illustrates how lender choice impacts your loan size.]

In summary, to calculate your own borrowing capacity, you’d take your annual income, deduct annual tax, deduct all annual expenses and debts, then see what mortgage payment fits into the remainder with a buffer. It’s complex to do manually, so using a trusted borrowing power calculator or getting a pre-assessment from a broker/bank is wise. Just inputting numbers online can give you a ballpark, but always treat online calculators as indicative – they might use generic assumptions that differ from actual lenders.

Now that we’ve covered how it’s calculated, let’s turn to the different types of lenders you can choose, because who you borrow from can be just as important as what you borrow.

Comparing Lenders: Major Banks vs Non-Bank Lenders vs Credit Unions

When seeking a home loan in Australia, you have a broad landscape of lenders: the big four banks and other major banks, smaller banks and regional banks, non-bank lenders, and credit unions / mutual banks. Each category has its pros and cons, and they can differ in criteria and service. Let’s compare them side by side, especially in context of borrowing power and loan criteria:

Aspect	Major Banks (Big Banks & Large ADIs)	Non-Bank Lenders	Credit Unions / Mutual Banks
Regulation & Funding	Regulated by APRA (must follow strict capital & lending rules, including the 3% serviceability buffer). Funded by customer deposits and wholesale markets. Very large balance sheets (e.g. CBA, Westpac each have >$1 trillion in assets).	Not regulated by APRA (no ADI license) but must follow ASIC’s consumer credit laws. Funded solely through wholesale investors or securitisation (they don’t take deposits). The government has encouraged non-banks as a “fifth pillar” for competition.	These are APRA-regulated ADIs that are customer-owned (no shareholders). They take deposits and lend them out like banks. Tend to be much smaller in size (all mutual banks combined ~2.7% of assets). Safe under same $250k deposit guarantee as banks.
Interest Rates & Fees	Competitive rates, especially for low-risk borrowers – big banks often offer specials but might not always be the very lowest. They may have package fees (annual fees in exchange for rate discounts and features). Because of scale, they can price keenly, but sometimes you pay a “big brand premium.” Always compare their advertised vs discounted rates.	Often very sharp rates to gain market share – many online lenders or non-banks undercut banks on interest rates. They have lower overheads (no costly branch networks) and no shareholder dividends, so they can pass savings on. Non-banks historically used exit fees (now banned) but have adapted with still-attractive pricing. However, specialist non-banks (for credit impaired or alt-doc loans) may charge higher rates due to risk.	Generally, credit unions/mutuals offer low rates and fees as well – they exist to benefit members, not to maximize profit. They often feature in “lowest rate” tables, especially for basic variable loans. Fees are usually minimal. However, some smaller ones might not have the absolute lowest rate due to higher funding costs, but many compete vigorously.
Serviceability Criteria	Fairly standardised, moderate criteria. Must abide by all APRA guidelines strictly (e.g. 3% interest buffer, limits on high LVR lending, etc.). They use HEM for expenses and typically require thorough verification of everything. Generally conservative but not overly so – they cater to the mass market. Some big banks have more lenient niches (e.g. accepting shorter job history) but overall they sit middle-of-the-road.	Varied criteria: Some non-banks target prime borrowers with ultra-competitive loans (similar criteria to banks), while others specialise in niche cases: self-employed with less paperwork (alt-doc), borrowers with past credit issues, or those needing higher DTI ratios. Non-banks can be more flexible with outside-the-box applicants (e.g. consider 100% of overtime or rent, or overlook a minor credit blip). They are not bound by APRA’s serviceability buffer rule, so technically could use a smaller buffer or unique methods – but they still practice responsible lending. Some actually have stricter policies in certain areas to manage risk (e.g. requiring 20% deposits on some loans). It really depends on the lender – non-banks span from very conservative to very accommodating. A non-bank might allow a higher loan for someone with multiple properties or higher expenses, when a bank says no.
Product Range & Features	The majors offer full feature loans (offset accounts, multiple splits, packages with credit cards, etc.). They also provide multiple products: fixed, variable, package, basic, lines of credit, construction loans, etc. You can often get all your banking in one place (everyday accounts, credit cards, insurance, etc.). Big banks invest in technology – e.g. slick apps, instant digital approvals for some, large branch network for those who prefer face-to-face. The downside: that breadth can come with less personal touch, and you might have to fit into their standard processes.	Typically focused on home loans only. Many non-banks offer just a few loan products – often a basic variable, maybe some fixed options, and perhaps offset via a third-party arrangement. You won’t get a transaction account or other services (except some partner with banks to offer an offset or redraw facility). That singular focus can mean they do mortgages really well and efficiently. Features like 100% offset are available with some (e.g. loans.com.au, Firstmac offer offset accounts) but others might only have redraw. Non-banks usually operate via brokers or online, with no branches. Service can be nimble but product choice per lender is narrower. If you want one-stop banking, a non-bank won’t do that – but you can always have your everyday banking elsewhere.	Breadth varies: Big credit unions (often rebranded as mutual banks) can offer a suite almost like a bank – savings accounts, offset, credit cards (through partners), etc. Many have decent online banking and a few branches or service centers. They tend to emphasize personal service – you’re a member, not a number. Product features on loans are competitive (offset, redraw, etc., often with lower fees). However, some smaller ones might have limited products or less sophisticated tech (though this is improving as many use modern banking platforms now). Overall, you can often get the whole banking relationship at a credit union if you wish, with generally high customer satisfaction.
Approval Speed & Flexibility	With their resources, big banks can approve standard applications quickly, especially via broker channels with good tech. However, they also handle huge volume, so turnaround can sometimes be slow or bureaucratic, especially for complex cases. Policy exceptions (bending the rules) are rare at majors – they have strict “no exception” policies nowadays or require high-level sign-off. Expect a very by-the-book process; if you don’t tick a box, an exception is not easy. On the plus side, their systems catch a lot upfront, so you know where you stand.	Many non-banks are nimble and can be faster for certain loans (less red tape). With fewer layers of approval, they might issue credit decisions quickly. Also, because they often cater to niche borrowers, they might manually assess and use more common-sense underwriting. This means if your scenario doesn’t fit a typical mould, a human can listen to the story and potentially approve if it makes sense. They might waive a minor policy point if compensatory factors exist. Non-banks often rely on brokers, who can negotiate or clarify directly with their credit team. Be mindful that some smaller non-banks may have limited staff, so if they get busy, times blow out – but generally they’re hungry for business and can move fast.	Credit unions pride themselves on personalized service. You may be able to speak directly with the credit officer or have a loan manager handle your case end-to-end. This can mean a more flexible approach if, say, one aspect of your application is a tad weak but others are strong – a mutual lender might take a holistic view rather than a computer-says-no approach. However, some mutuals are also quite conservative, sticking strictly to policy (varies by institution). Turnaround times vary – some are very quick, others can be slower especially if they do manual processing. But as customer-owned institutions, they tend to really care about helping members, which can translate to extra effort to make a deal work (again within reason; they won’t do anything unsafe).
Credit History Tolerance	Majors typically want clean credit files for the best rates. Minor issues (a missed bill from years ago) might be okay, but recent defaults or mortgage arrears are usually a decline. They don’t do “credit impaired” loans – you’d go to a specialist. Major banks do have hardship teams and such, but for a new loan, you need a solid record. They also prefer lower risk overall – e.g., if your credit score is low (even without defaults), they might hesitate or offer a smaller loan.	More forgiving on credit: Many non-bank lenders specialize in loans for people with past credit problems (often called specialist or subprime loans). They might approve someone with defaults or bad credit, at higher interest and/or lower LVR. Even the prime non-banks often have a tiered pricing for different credit scores. So if your credit isn’t perfect, a non-bank may be your best bet. They’ll still ensure you can afford the loan (responsible lending) but they factor in the risk via pricing. Just know that using such a lender can be a stepping stone – after a few years of clean repayment, you might refinance to a prime lender at a lower rate.	Generally, credit unions want good credit as well, but some small mutuals might listen to context (especially if it’s their own member with a long history, they might be more understanding of a one-time issue). They don’t usually cater to bad credit borrowers explicitly (no “specialist” products), but they may have a bit more heart in considering someone who had a rough patch. Still, any open unpaid defaults will likely be a no-go. In short, expect credit unions to align with mainstream credit standards – they’re not lax, but they might not auto-decline a thin credit file or an old paid default if everything else is strong and you explain the situation.
Pros	Stability and trusted brands; broad product offerings (one-stop shop); often have branch access; cutting-edge tech (instant payments, good apps); can offer large loans and complex solutions for affluent clients (cross-collateral, professional packages); strict regulation equals safety.	Competitive rates (for prime borrowers) and solutions for non-standard cases; flexibility in criteria (can maximize borrowing capacity in many cases); faster or more personalised credit decisions; variety of niche products (alt-doc, no genuine savings, etc.); not tied to APRA rules so can be creative (e.g. lending to investors when banks hit caps). Government support post-GFC has made them stable and an important source of competition.	Member-focused service (you’re an owner too); profits reinvested into better rates and community benefits; often very competitive rates and lower fees; high customer satisfaction; same regulatory protections as big banks (deposits guaranteed, prudent lending); sometimes more willing to consider individual circumstances rather than one-size-fits-all. Also, many credit unions have merged and grown, so some are quite robust in offerings and tech.
Cons	Can be inflexible on policy (little room for exception); may decline over small details; at times not the absolute lowest rate (you might pay a bit for brand/offset feature); with huge scale, customer service can feel impersonal or bureaucratic for some; historically had scandals (fee for no service, etc.), making some borrowers cynical – but they’ve made improvements.	Limited other services (you’ll need another bank for daily banking); some lesser-known non-banks lack brand recognition (though they’re regulated by ASIC and as safe for borrowers – remember if a lender were to fold, your mortgage just gets transferred, it doesn’t disappear nor does it harm you as a borrower); funding for non-banks can dry up in crises (though government has supported them to ensure competition). If you go very niche (like a lender that approves low docs or bad credit), you’ll pay more interest. Also, non-banks not under APRA don’t have the federal deposit guarantee (irrelevant to you as a borrower, but means you can’t deposit money with them except offset via partner bank).	Smaller footprint – fewer branches (maybe none in your city if it’s a regional CU); technology and online banking can be slightly behind top-tier banks (though many are up-to-date now); potentially slower processing if they have smaller staff; policy can actually be conservative since they must lend responsibly with member funds – some may have quirks like lower max lending limits, or be hesitant with big investors or unusual properties. Membership criteria used to be an issue (e.g. some were only for certain professions), but nowadays most are open to all, or joining is as simple as a $10 member share.

As you can see, there’s no one “best” type of lender for everyone. It truly depends on your needs and situation:

• If you have a straightforward application and value a long-standing brand with all the bells and whistles, a major bank might suit you.
• If you’re outside the box (say self-employed with one year’s income, or you want to maximise borrowing capacity and one lender offers more), a non-bank or smaller bank could be the key. Don’t let the term “non-bank” scare you – they are legitimate, regulated lenders and often just as professional. They simply get their funding differently and can sometimes take cases the big banks won’t. Many Australians use non-bank lenders and are very satisfied, especially with the competitive rates and service levels.
• If you appreciate a community feel, low fees, and possibly a more personalised approach, a credit union or mutual bank might make you happiest. They consistently rate well in customer satisfaction (often higher than the big banks) and tend to offer sound advice and assistance to their members.

Crucially, compare on individual product merits too – interest rate, comparison rate, fees, features. As one finance commentator put it, “the organisational structure of your financial institution should be largely irrelevant – focus on the rates, fees, and features that suit your needs”. In other words, don’t choose a lender just because of their type; choose the specific loan that best matches your objectives, whether it’s from CBA or XYZ Credit Union or Online Lender Co.

Many borrowers enlist a mortgage broker to do this comparison shopping. Brokers have access to a huge range of banks, non-banks, and credit unions, and their job is to know which lender is hungry for which type of borrower. For instance, if you need maximum borrowing power, a broker will know which 2-3 lenders could lend the most to you (and which of those have decent rates). If your priority is lowest rate, they’ll know that too. They also can negotiate with lenders on pricing or policy exceptions sometimes. And remember, using a broker usually costs you nothing – they’re paid by the lender (disclosed via commission) – and you get the benefit of their market knowledge.

[🚀 Action Step: Ready to explore your options? Feel free to reach out to a Fundd broker via our contact page. We work with a wide panel of lenders – major banks, reliable non-banks, and customer-owned lenders – and can quickly identify who will best fit your situation. Whether you need a big four bank’s package or a niche lender’s flexibility, we’ve got you covered and will guide you through the pros and cons.]

Next, let’s look at some practical tips to improve your borrowing capacity. Many of these you can start doing even before you apply for a loan, to put yourself in the best position.

Tips to Improve Your Borrowing Power

If you’re finding that your borrowing capacity isn’t quite meeting your goal – maybe the numbers are coming up short for the price of the home you want – don’t lose hope. There are several strategies to increase borrowing capacity or make your application stronger. Some require time and planning, but even small changes can have a meaningful impact on that serviceability formula we discussed. Here are some tips:

1. Reduce or Eliminate Unsecured Debts

High-interest consumer debts are double trouble: they hurt your cash flow and lenders count them heavily against you. Paying down or closing these can free up a lot of borrowing capacity:

• Credit cards: If you have credit card balances, try to pay them off. Even if you pay in full each month, consider reducing your credit card limits if you don’t need them. Lenders often assume ~3% of the limit as a monthly expense. So a $10k limit might “use up” $300 of your monthly capacity. If you have multiple cards with high limits that you never actually use, cut them down or cancel one. It’s an instant boost. Example: Reducing a $20k total credit limit to $5k could improve your borrowing power by roughly the equivalent of $450/month in expenses saved, which could be tens of thousands more in loan size.
• Personal loans / car loans: These fixed payments can significantly cap what you can borrow. If you’re able, pay off smaller loans in full before applying for a mortgage. Even paying down a loan somewhat can help, though many lenders will still use the same fixed payment unless you fully refinance or recalc the loan. So paying it off entirely is best. Some folks take a consolidation approach (e.g. use savings to clear a car loan) to clean the slate. Just ensure you don’t then go lease a new car! No new loans when you’re trying to get a home loan.
• Buy Now, Pay Later (BNPL): Services like Afterpay, Zip Pay, etc. – treat them like credit. Lenders are increasingly looking at these. If you have open BNPL accounts, consider closing them out for now. Even if they don’t show on credit reports, the payments show in bank statements and are effectively another commitment. At minimum, avoid using them in the lead-up to your application.
• HECS/HELP debts: You can’t magically eliminate student loans unless you have spare funds, but knowing that a HECS repayment (which might be several hundred a month depending on income) is hampering capacity, some borrowers choose to pay off a HECS debt if it’s small. This is only if you have surplus savings – it’s not usually recommended to use your home deposit funds for that. But if, say, you have a $5k HECS remaining, clearing it means one less ongoing deduction from your income (and one less thing the bank subtracts).
• Store cards, interest-free plans: Same as other debts – pay them off or close them. Even if “interest-free,” they count as commitments.

Why this helps: Every dollar of debt payment you eliminate is a dollar that can go towards mortgage repayment in the bank’s eyes. Reducing liabilities is often the fastest way to boost borrowing capacity. Plus, having fewer debts improves your overall financial health and credit profile.

2. Cut Down Your Living Expenses (Before and During Application)

As discussed, high living expenses reduce how much spare income is available for a loan. Look for ways to trim the fat from your budget, especially in the months leading up to your loan application:

• Make a budget: Track where your money has been going (you can use budgeting apps or bank tools) and identify areas to save. Can you cook at home more instead of UberEats? Cancel or pause some subscriptions you don’t use much (streaming services, expensive gym memberships – perhaps switch to a cheaper gym or free outdoor exercise, etc.). Even a few hundred dollars less spending a month can translate to a noticeably higher loan amount.
• Avoid large discretionary purchases now: That new car, expensive furniture, or holiday – if it can wait until after your loan settles, consider postponing. Large expenditures not only deplete your savings (which you might need for the house purchase) but also show up as higher spending. Lenders don’t explicitly say “no holidays,” but if you’re borderline on serviceability, it’s wise to tighten up temporarily.
• Document any expense reductions: If you had high expenses in the past but have since changed your habits, make sure this is evident. For example, if six months ago you were renting a pricey apartment and spending $1000/week, but now you moved back home to save and your expenses dropped, note that in your application (and ensure your current bank statements reflect the lower spend). Lenders often look at the most recent 3 months – so by consistently reducing expenses for a few months, you build a case.
• Lifestyle adjustments: This might include small sacrifices like fewer nights out, opting for generic brands at grocery shopping, conserving energy to lower utility bills – all of which might not be directly seen by the lender line-by-line, but they indirectly ensure you’re not struggling with expenses. Remember, the lender will use HEM if you go too low, but at least show you can live within reasonable means. And practicing a budget now will help when you do have a mortgage to pay.
• Care with dependents’ costs: If you have kids in private school or daycare, those are big expenses that lenders absolutely factor in. While you may not want to change that (it’s a personal decision), be aware of the impact. In some cases, people time their home purchase when a child is about to start public school instead of private, or after daycare ends, freeing up hundreds per week. This isn’t always feasible, but it’s something to consider in your family planning.
• Married vs single living expenses: If you’re single, you have one HEM. A couple generally has a combined HEM that’s higher, but not double (there are some economies of scale). If your partner isn’t working and you’re the sole earner, you effectively have 1.5x HEM or so with two adults. If your partner works, their income helps anyway. Just know that a non-earning partner does add to the expense load (and lenders will assume you support them unless evidence says otherwise). Some couples choose to have both on the loan even if one’s income is smaller, so at least their low income offsets the additional expense counted; other times it’s better to apply singly if the second person has no income and affects nothing but expenses – this can vary by scenario and lender policy.

Why this helps: Lowering your expense footprint directly increases the surplus in the serviceability calculation. It can also ensure the lender doesn’t question your application. If you claim low expenses but they see extravagant outflows, that can cause delays or even a reduced loan offer. Showing a lean and mean spending pattern for a while strengthens your case and your ability to handle mortgage repayments.

3. Increase Your Income (or Use More of It)

Easier said than done, right? But even a slight bump in income can boost borrowing capacity. Here are some ideas:

• Negotiate a raise or new job: If you’re due for a pay rise or you see opportunity to level up in your career, doing so before applying can increase your borrowing limit. Lenders like to see at least a few payslips at the higher income, so timing matters. If you switch jobs, ideally be in the new role (in the same industry) for at least 3 months or off probation for most banks to be comfortable, although some will accept even new employment with a letter of offer. A higher stable salary is the most straightforward way to borrow more.
• Overtime/Bonus – document it: If you regularly work overtime or get bonuses but a lender wouldn’t count it fully because no evidence, make sure to collect evidence. Perhaps delay your application until you have 6-12 months of consistent overtime pay (so it can be included at 80-100%). Or get a letter from your employer as mentioned earlier. Maximising what portion of your existing income the bank will count is key. For example, if you expect a big bonus in 2 months, and it will show on your PAYG summary, it might be worth waiting to apply so you can use that in the average.
• Add a co-borrower: Buying with a partner or even a family member? Their income can significantly increase borrowing power (as long as their expenses/debts don’t offset it). This is a major reason many couples can afford a house together that a single person couldn’t. Of course, co-borrowing is a huge commitment and not to be taken lightly (both are jointly responsible for the debt). But if you’re purchasing with your spouse anyway, make sure to leverage both incomes on the application. If you’re single, this may not apply – although some siblings or parent-child duo do co-buy an investment property. Lenders will then include both parties’ incomes and all expenses. (If a co-borrower won’t actually be living in the property or benefiting, another route is a guarantor – see below – but guarantors don’t directly increase borrowing serviceability since their income isn’t counted towards your loan, they just offer security support.)
• Take on additional work (carefully): Perhaps you have room for a side hustle or some freelance work to earn extra income. Lenders will want to see a track record (usually two years if it’s self-employed side business, or at least 6-12 months if it’s a consistent part-time second job). So this is more a long-term strategy. But even doing overtime or extra shifts for a period can beef up your savings (for deposit or to pay down debts) and possibly show higher income if payslips reflect it. Just be cautious not to burn out. And note, if the extra income is very recent, lenders might not count it until it’s established.
• Use investment income smartly: If you have assets, ensure they’re working for you. Renting out a spare room could provide rental income (though many banks won’t count “boarder” income unless formal, or they might take 50%). If you have an investment property, make sure you’ve got a market rent (increase the rent if it’s under-rented – more rent = more serviceability, albeit at 80%). If you have dividend-earning investments, provide documentation so the lender includes that income. Every bit helps.
• Tax efficiency vs borrowing: If you’re self-employed, there’s often a trade-off between minimising tax and maximising borrowing power. Many business owners try to write off expenses to reduce taxable income. However, if you plan to get a home loan, consider showing healthier profits for 1-2 years (even if it means paying a bit more tax) so that your borrowing capacity is higher. It might be worth it to qualify for the loan you want. You can talk to your accountant about this strategy – sometimes holding off on purchasing new equipment or deferring expenses can make one year’s profit look higher.
• Include all allowable income: Don’t overlook any income sources on your application. Do you get annual leave loading? A uniform allowance? Car allowance? List them. Do you earn occasional commission or have a part-time job aside from your main job? List it (with proof). Some people forget that the little things can add up or help the case. Even government payments like FTB for your kids – if you need it to service, include it and provide Centrelink statements. If it’s not needed, some leave it out to simplify, but if borrowing is tight, every dollar matters.

Why this helps: More income is obvious – it raises the top line of the equation. The bigger the income (or the more of it that counts, after shading), the more room you have to cover expenses and mortgage payments. Lenders also like to see strong, stable incomes as it generally correlates with less risk.

4. Increase Your Deposit (Lower the Loan-to-Value Ratio)

While your deposit (down payment) doesn’t directly change your income or expenses, it can indirectly improve your borrowing situation and options:

• Avoiding LMI: If you can reach a 20% deposit (thus 80% LVR loan), you avoid Lenders Mortgage Insurance. While LMI doesn’t factor into the serviceability calc as a monthly expense, it’s a cost that either adds to your loan or upfront cash. Without LMI, your loan balance is lower (or you don’t need to borrow extra to cover the LMI premium). A slightly smaller loan means slightly lower required income to service. Also, more lenders will compete for <=80% loans, potentially giving you better rate offers, which in turn improve affordability. That said, many first home buyers find 20% deposit unrealistic, which is why schemes and LMI exist – so it’s not a must, but it’s a nice goal.
• Using FHB grants or family help: Tapping into First Home Buyer grants or schemes can boost your effective deposit. For instance, the First Home Guarantee allows eligible buyers to purchase with only 5% deposit without LMI – the government acts as guarantor. That doesn’t raise borrowing capacity per se, but it does reduce cost. If parents are willing to be guarantors, you could borrow 100% of the property price (no deposit required). Again, guarantor support doesn’t change your need to service the loan, but it can eliminate LMI and speed up the purchase. Some lenders may even be a bit more lenient with a parental guarantee in play, but they’ll still check you can afford the loan on your own income.
• More deposit = less loan needed: This is straightforward – if you actually don’t need to max out your borrowing because you brought more cash to the table, then capacity is solved. For example, if you want a $600k house and only have $60k deposit, you’d need ~$540k loan plus costs. If you somehow increase your deposit to $100k (through extra savings, gift, selling an asset), now you only need $500k loan. A smaller loan is easier to service. Of course, saving tens of thousands more might be slow, but consider short-term tactics like using temporary COVID-era savings, bonuses, or selling a car/asset if home ownership is the priority. Some even tap into superannuation (FHSS Scheme) or other sources to beef up deposits.
• LVR tiers and interest rates: Some lenders give better interest rates at lower LVR tiers (like <70% loans might get a discount). A better rate means lower repayments and better serviceability. While you shouldn’t over-capitalize just for that, it’s a side perk of a higher deposit.
• Property selection and price: If capacity is a bit short, you could also reconsider the target price. Maybe instead of that $600k property you aim for $550k. A slightly cheaper property means a smaller loan required, which could bring it within what the bank will lend. It’s not exactly “improving” capacity, but it’s adjusting the goal to fit capacity. Alternatively, consider properties where you might get a little rental income (like a house with a granny flat to rent out) – though owner-occupiers rarely do that initially, investors do look at yield.

Why this helps: Having a bigger deposit doesn’t magically increase the number the bank says you can borrow based on income – but it can lower the needed loan amount to within your borrowing capacity. Additionally, it can remove extra costs (LMI) and open up more favorable lending options. It’s essentially another way to close the gap if you’re falling short. And it gives the bank more confidence (lower risk for them), which sometimes can make tough applications look a bit better.

(Speaking of deposits: we have articles covering various deposit scenarios – like how to buy with a small deposit (e.g. 5% or even 0% with guarantor). For instance, check out our piece on “6% Home Loans in Australia” on our Resources blog, which discusses options when you have only around a 6% deposit. It’s a good read for creative strategies, but remember, even low-deposit loans require you to service the debt comfortably.)

5. Choose the Right Loan Terms and Products

Certain choices in your loan setup can affect borrowing power:

• Opt for a 30-year term (or even 30 years + IO period): As mentioned, a longer term reduces the monthly burden. All else equal, a 30-year loan has a lower payment than a 25-year loan. So stick with the longest term available to maximize capacity. If you want to pay it faster, you always can by making extra repayments, but having the option of a lower minimum payment gives breathing room. Some lenders even offer 35 or 40-year terms for first home buyers – these are less common and come with caveats (you’ll pay more interest overall). A 35-year term could further reduce the payment slightly, improving serviceability, but consider the long-term cost. Most people cap at 30.
• Avoid interest-only for owner-occupier loans (if capacity is tight): Since banks penalize IO in servicing, if you don’t absolutely need interest-only, go principal & interest. P&I not only is easier to get approval for (banks know you’re paying down the loan), but it also often comes with lower interest rates for owner-occupiers. IO is mainly beneficial for investors’ cashflow/tax, but it’s a trade-off with borrowing power. Some investors manage capacity by doing P&I on their home and IO on investment, but banks still assess the IO one as P&I over shorter term in many cases. So coordinate with a broker on the best structure if you have multiple loans.
• Consider fixed vs variable: Generally, whether a loan is fixed or variable doesn’t directly change the serviceability calculation (they’ll still apply the buffer to the rate). However, some lenders have slightly different qualifying rules for certain fixed loans (especially if interest-only fixed). It’s minor, but one thing: if you lock a rate that’s high, the buffer goes on that high rate until expiry. If rates are expected to drop, a variable might allow your real rate to drop (though they always test at a buffer anyway). Not a huge factor, but worth noting that some lenders used to qualify 5-year fixed at either the fixed rate + buffer or revert rate, whichever higher. In current practice, assume buffer on whatever rate, fixed or not.
• Avoid added bells and whistles that could constrain you: For example, some people think about offset accounts – offset is great for flexibility, but some basic loans without offset have slightly lower rates or easier credit criteria. If a no-frills loan has a lower rate, it might improve borrowing power. That said, nowadays the difference is slim and many basic loans have the same rate as package loans. So product features don’t usually affect capacity directly, but anything that influences the interest rate or fees does. Keep it simple if simplicity yields a better pricing.
• Debt consolidation at time of loan: If you have some debt remaining that you can’t pay off beforehand, one strategy is to consolidate it into the home loan (essentially borrowing a bit extra to pay out that car loan or credit cards). This can improve your monthly cashflow because instead of a $300/month car loan that might only have 2 years left (which is a heavy hit), rolling it into 30-year mortgage spreads it out to maybe like $50/month. But caution: this means turning a short-term debt into a long-term one (you’ll pay more interest over time if you don’t pay it off faster). Also, not all lenders allow cash-out for debt payoff, and it increases your home loan size. Yet, from a serviceability viewpoint, it can help you qualify. It’s best done with advice and discipline (you should aim to still pay that portion off faster, but at least it got you the house).
• First Home Loan Deposit Scheme / Government schemes: If you’re eligible for government support (like the First Home Guarantee or a state government income-based loan scheme), sometimes the criteria differ. For example, some schemes might allow a higher debt ratio because they view you as a priority segment. It’s not that common, but worth exploring any special programs for first home buyers in your state – occasionally, they provide more generous terms or interest rates which indirectly improve affordability.

6. Improve Your Credit Profile

Again, credit score isn’t in the math for borrowing capacity, but it impacts which lenders you can use. A better credit score means more lenders competing for you, possibly better rates (some have risk-based pricing), and smoother approval. Indirectly, if a poor credit forces you to a lender with higher rates, that reduces capacity. So:

• Check your credit report before applying. Ensure no errors or surprises. If you find unpaid defaults, try to resolve them.
• Avoid applying for multiple loans/credit in the months leading up to your home loan. Each inquiry can ding your score and make banks nervous (“Why did you apply for 3 credit cards in the last 6 months?”). Live lean on credit prior to a mortgage.
• Demonstrate good repayment history on any existing loans. Some lenders use comprehensive credit reporting, which shows if you paid on time. A perfect track record on your car loan or credit card looks good and gives the lender confidence to perhaps stretch a bit.
• Don’t max out existing credit lines. It’s better to have low utilization on cards (and definitely avoid late payments). If your score is on the cusp, maybe do things like pay down balances to zero a month before so they report as paid.
• If your credit score is low due to past issues, consider waiting a bit if possible – scores improve over time as negatives age and if you keep everything current. Or consider non-bank/specialist as a stepping stone.

While these credit moves don’t directly change the calculation, they affect whether you get approved at all and under what conditions. A cleaner profile means you can access lenders with optimal criteria.

7. Enlist Professional Help

This might sound self-serving, but truly: talk to a mortgage broker (like us at Fundd 😇). We can analyze your situation holistically and suggest tailored improvements. For example, we might see on your bank statements a particular expense you forgot to mention that could be cut, or identify that Lender X would accept your overtime whereas Lender Y wouldn’t – so we’d steer you to Lender X. A broker also ensures your application is presented correctly (so the lender doesn’t misinterpret something as a cost when it isn’t).

We can run multiple lender calculators to benchmark your borrowing capacity across, say, 30 lenders. This costs you nothing and gives you a clear target – maybe we find one that can lend $50k more than others because of slightly better treatment of your situation. That could save you from needing to implement other drastic changes.

Also, a broker might advise on timing – e.g. “Wait one more month so you have a full 6 months of consistent higher income” or “Pay off that last $2k on the credit card and then we apply.” Little tweaks can mean approval vs decline.

And importantly, we act as your advocate. If your borrowing power is just shy of the needed amount, sometimes we can make a case to the lender (with detailed notes, explanations) to show why it’s still a responsible loan. Lenders do have some discretion if an application is strong in other areas (like big deposit, stable job, etc.). While the numbers rule, an underwriter can possibly allow slightly higher DTI if mitigated. That’s not something you can typically negotiate on your own – but brokers often know which lenders might flex just enough to make a deal work (within regulatory bounds).

In short, you don’t have to figure this all out alone. Leverage expert advice so you don’t miss an opportunity or overlook a simple change that could get you into your dream home sooner.

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By implementing these tips, you can potentially move the needle on your borrowing capacity quite a bit. For example, one borrower followed several of these steps – closed a credit card (saving $200/mo in assessment), trimmed expenses by $300/mo, and paid off a $5k personal loan – and saw their theoretical borrowing limit jump by nearly $50,000. Every situation is unique, but there is often something you can do to improve.

Lastly, a word of caution: only borrow what you’re comfortable repaying. It’s possible with all these tactics to stretch to a very high loan relative to your income. But remember, the more you borrow, the less wiggle room you’ll have if things change (interest rates rise, you want to start a family, etc.). The bank’s maximum isn’t necessarily your ideal budget. So use these strategies to ensure you can get the loan you need, but also do your own budget and make sure you’ll be able to live with it. Owning a home comes with extra costs (maintenance, council rates) that you should factor into your personal affordability calculation, even if the bank’s calc is okay with it.

[👉 Next Step: Before making any big moves, why not discuss your scenario with us? We can provide a free borrowing capacity assessment and personalised tips. Contact a Fundd broker today and we’ll help you chart the best path to finance your first home or investment property.]

FAQ: Home Loan Borrowing Capacity and Lender Assessments

Q: What do banks look for in a home loan application?
A: Banks typically evaluate the “5 Cs”: Capacity, Character, Collateral, Capital, and Conditions. In plain terms, they look at your capacity to repay (income vs expenses/debts – the focus of this guide), your character (credit history and reliability), the collateral (the property value and type – they’ll do a valuation to ensure it covers the loan), your capital (savings or deposit and other assets, which show financial stability), and the loan conditions (the loan purpose, interest rate environment, etc.). If you’re a first home buyer, they also like to see you’ve accumulated some genuine savings (or consistent rent history) if you have a low deposit. In short, a solid stable income, good credit, a sufficient deposit, and a property in good condition/value are what you need to check their boxes. Each bank may weigh factors slightly differently, but all will stress-test your finances to ensure you aren’t taking on more than you can handle.

Q: How do lenders verify my income and expenses?
A: Income verification is done via documents: for PAYG employees, this means recent payslips, possibly employment letters, PAYG summaries or tax returns. They might call your employer to confirm employment. For self-employed, they’ll use your tax returns, Notices of Assessment, and sometimes Business Activity Statements or accountant letters. If you have rental income, they’ll ask for a lease or a managing agent’s statement, and check your tax return’s rental schedule. Expenses verification is a bit trickier – primarily, they examine your bank account statements and credit card statements. They look for consistency with what you declared. If something stands out (say you declared $2k/month living expenses but $4k/month is flowing out of your account), they’ll question it. They also check for undisclosed debts (every liability should show either on your credit file or statements, so it’s hard to hide one). For things like utility bills or childcare, usually your statement transactions suffice as proof. If any large regular expense doesn’t show up on statements (e.g. you pay school fees annually in a lump sum), you might proactively provide that info. In summary, they use a combination of documents and transaction analysis to verify the numbers you provide.

Q: What is HEM and how does it affect me as a borrower?
A: HEM (Household Expenditure Measure) is a benchmark for living expenses that lenders use as a minimum for your cost of living. It’s based on averages of Australian household spending, adjusted for your family size, etc. When you apply for a loan, the bank compares your stated monthly expenses to HEM. If your stated expenses are lower than HEM, they’ll likely use the higher HEM figure to be safe. If your stated expenses are higher, they’ll use your figure. So HEM can effectively override your expense estimate if you claim you live very cheaply. For you, this means there is a floor to how much the bank will assume you need for living. If you’re single with no kids, maybe HEM is around $1,500–2,000 a month (varies by lender and income level). If you say you only spend $1,000, the bank will still count roughly $1,500+. If you have a family, HEM could be $3,000–4,000+. Knowing this, there’s little point in under-reporting expenses – focus instead on keeping them reasonable. Also, HEM being updated over time (it can go up with inflation) might tighten borrowing power even if your habits don’t change. It’s basically the bank saying “Even if you think you can live on two-minute noodles, we won’t lend such that you’d have to.” As a borrower, assume at least a moderate expense level will be used. HEM protects you in a way, by not allowing an unrealistic budget to underpin your loan.

Q: My living expenses are higher than the HEM benchmark – will that reduce how much I can borrow?
A: Potentially, yes. If your actual expenses are higher than HEM, the lender will use your higher actual expenses in the serviceability calculation. This means less net income available for loan repayments, resulting in a lower borrowing capacity. For example, HEM for your profile might be $3,000/month, but if you genuinely spend $4,000, that extra $1,000 will directly subtract from what could have gone toward a mortgage payment. You’ll either need to reduce your spending or accept borrowing less. Lenders may ask you whether any of those expenses are discretionary (e.g. high travel or dining costs that you could cut back). If you convincingly show that you would tighten your belt once you have a mortgage, some lenders might accept a slightly lower figure than your current spending – but most will err on the side of what you’ve been spending, as evidence of your lifestyle. It might be worth reviewing your expenses to see if some of the high costs are temporary or can be reduced. However, if they are truly ongoing and non-negotiable (like medical expenses or school fees), then yes, your borrowing capacity will be constrained by those higher costs. Every $100 less you spend a month can add roughly $10k or more to your loan capacity (rule of thumb), so trimming the fat can help. In summary: higher-than-HEM expenses = lower borrowing power, unless you adjust those expenses downward.

Q: Can I get a home loan if I’m self-employed or have irregular income?
A: Absolutely, yes – but be prepared for a bit more paperwork and possibly stricter review. If you’re self-employed, most lenders want to see at least two years of steady income from your business. They’ll average your last two years’ profits (or take the lower year) to smooth out variability. If your income is growing, some will consider the latest year more heavily, especially if the nature of business supports that growth. If your income is irregular (say you’re a contractor or casual worker, or your income comes as large quarterly commissions), lenders will either average it out or want a longer history to ensure it’s consistent. In cases where standard proof is difficult – e.g., you just started a business last year – there are non-bank lenders offering alt-doc loans where you can verify income through other means (BAS statements, 12-month business bank statements, etc.). The trade-off is often a higher interest rate or lower max LVR. If you have irregular income, one tip is to build a strong case with documentation: show contracts, show a stable client base, have an accountant letter explaining the nature of your income if seasonal, etc. A good broker can present your file to highlight stability (maybe you’ve been in the same industry for years even if contracting). Also, having a larger deposit can offset some lender concern. In short, irregular income borrowers can absolutely get loans – many property investors are self-employed or on variable pay – you just might not get the absolute max borrowing that a very standard PAYG earner would, and the lender pool is narrower. But plenty of lenders (even big banks) lend to self-employed folks all the time. It’s about showing a track record and future viability.

Q: Do different banks really offer different loan amounts to the same person?
A: Yes, sometimes the difference is surprisingly large. Each bank has its own serviceability calculator and credit policy, so the maximum loan they’ll approve can vary. For example, Bank A might approve $500k while Bank B would only do $450k for the same borrower. We touched on reasons: different HEM assumptions, different treatment of income (one might accept 100% of your bonus, another only 60%), different interest rate buffers or minimums, etc. As an illustration, a 2025 report showed five major lenders all giving slightly different max loans on identical profiles – e.g., one major bank might lend a few thousand more or less than another, and a smaller lender might lend even more. Non-bank lenders often push those limits further (within responsible lending bounds). This is why if you’re tight on borrowing capacity, it’s valuable to compare lenders. It doesn’t mean one bank is reckless – it just means their model of your expenses or risk tolerance differs. On the flip side, if your scenario is very vanilla and you’re not near the edge of your capacity, you might not notice much difference – many lenders would all offer well above what you actually need, in which case you choose based on rate/feature. But if you’re pushing your limits, shop around. A broker will often present “Lender X can lend $Y more than Lender Z, but maybe at a slightly different rate – let’s weigh up what you need.” As long as you stay within what you can personally manage, it’s fine to choose the lender that gives you the borrowing room you need to make the purchase.

Q: What is a “serviceability buffer” and how does it impact my loan amount?
A: The serviceability buffer is an extra margin added to the interest rate when banks calculate your ability to repay. It’s basically a safety net to ensure you can still afford the loan if rates rise or things change. Currently, the common buffer is +3.0% on top of your loan’s actual interest rate. So if your rate today would be 5%, the bank assesses your repayments at 8%. Some have a minimum floor as well (e.g., even if rates drop, they might still test at say 7% minimum). This buffer directly lowers the loan amount you qualify for, compared to if they used the actual rate. It’s why you might find, “I can afford repayments of $2,500 a month on a $500k loan at 5%, why won’t the bank lend me $500k?” – answer: because they’re actually calculating it at $3,000+ a month (at 8%) and maybe your income doesn’t cover that comfortably. When interest rates in the economy go up, the buffer moves up too (since it’s usually a fixed 3% margin), which reduces borrowing capacity significantly. For example, in mid-2022 many could borrow less than in 2021 because not only did rates rise, but the buffer on those higher rates made serviceability much tougher. The buffer impacts everyone: even if you have a high income, it sets a cap. For lower income or higher expenses, it’s often the reason you can’t borrow as much as the payment at current rates might suggest. Think of it as the bank’s way of stress-testing your finances. As a borrower, it’s a good thing – it prevents you from taking a loan that’s only affordable at low rates and getting into trouble if rates normalise upwards. You can’t really change the buffer (apart from going to a non-bank that might use a slightly different approach, but most still use ~3%). So we all have to live with it; it just means our borrowing limits have that baked-in prudence. Always ask your lender or broker, “At what interest rate did you assess my loan?” – they’ll tell you the figure, which helps you know how much headroom you have.

Q: Will the bank count my bonus/overtime/commission in full when calculating my borrowing power?
A: Usually not in full – most lenders shade or average variable income like bonuses and overtime. They might count a portion, like 50% or 80%, depending on consistency. Typically, if you have a steady track record (say 2 years of similar bonuses or very regular overtime hours), a lender might take an average of that and then use perhaps 80% of it in their calc. Some conservative ones might use 50% or even exclude it if it’s irregular or not guaranteed. A few lenders (particularly some second-tier or non-banks) will count 100% of overtime or commission for certain industries or if you can show it’s a normal part of your pay. But that’s the exception rather than the norm. So, expect that variable pay will be discounted. For instance, if you earn $70k base + $30k bonus, a bank might assess you as earning maybe $80k or $85k for serviceability, not the full $100k. It’s a bummer, but from their view, they’re being prudent in case one year’s bonus is smaller or overtime isn’t always available. If your variable pay is critical to affording a bigger loan, it’d be wise to apply with a lender known for being generous with that type of income (again, a broker can point you). Also supply plenty of evidence: letters, payslips, etc., to maximize what they’ll use. But bottom line, don’t expect 100 cents on the dollar for irregular income categories unless you find a lender who explicitly allows it (or unless you fall into a category like emergency services worker overtime, which some banks use 100%). Always ask how the lender treated your bonus in the pre-approval – it can vary, and that affects your max loan.

Q: The bank pre-approved me for a certain amount. Is that guaranteed I’ll get that amount when I buy?
A: Pre-approval (also called conditional approval) is a great step, but it’s not a guarantee. It means the lender has done an initial assessment of your capacity and credit, and said “in principle, we’d lend up to $X, subject to some conditions.” Common conditions include: finding a suitable property (they’ll do a valuation), no changes in your financial situation, and sometimes verification of details if not fully checked yet. When you go to draw down the loan, they will re-check things. If your circumstances haven’t changed and the property meets their criteria (valuation at or above purchase price, acceptable type of property), you should get the formal approval for that amount. However, if something changes – e.g., you took on a new loan, you changed jobs, interest rates rose which affects their calc, your credit score dropped, or the property valued low – the final approved amount could be lower or in worst cases the approval could be withdrawn. Also, pre-approvals often have an expiry (typically 3–6 months). If you take too long to find a place, you might need to refresh it. So treat pre-approval as highly likely but not 100%. Don’t go signing contracts above your pre-approved amount either; stay within it or ideally a bit below to leave room. And avoid doing anything that could jeopardize it – like don’t finance a car or max your credit card after getting pre-approved, as that would change your scenario. Many people successfully buy within their pre-approved limit with no issues. Just understand it’s “conditional.” Final formal approval happens once the property is chosen and all conditions are satisfied. If you remain the same financially and the home is fine, it’s effectively guaranteed then.

Q: How do dependents (like children) affect my borrowing power?
A: Dependents increase your living expense needs, which directly reduces borrowing capacity. Lenders account for each dependent (child or any person financially dependent on you) typically by using a higher HEM benchmark for your household size. For example, a single person might have HEM $1.5k, a couple maybe $2.2k, a couple with one child $2.7k, with two kids $3.2k, etc. (hypothetical values). The more kids, the more the assumed expenses. Daycare or school fees on top also must be counted if relevant. So yes, each child can shave off some borrowing ability. Roughly, each dependent might reduce max loan by tens of thousands because of the added cost. Lenders also often reduce the amount of Family Tax Benefit or other income they count as kids age (since support payments might stop at 16-17). If you are planning to have kids soon, that’s not usually factored until they’re actually on the way or born. But if you’re currently pregnant or on parental leave, that can complicate things (banks will ask how you’ll manage on reduced income during leave, etc.). As for other dependents – if you support an elderly parent or a non-working spouse, they also count. A spouse who is not on the loan but not earning is treated as a dependent in most cases. If your spouse works, then they wouldn’t be a dependent; instead you’d ideally include them on the loan application so their income is counted. In summary, more dependents = less free income in the bank’s eyes, thus lower capacity. It’s one of the reasons some people find they could borrow heaps when they were single or a dual-income-no-kids couple, but once kids come along, their available borrowing for upgrading the house is more limited.

Q: Can a guarantor or co-signer help me borrow more?
A: A guarantor can help you buy with less deposit (they secure part of the loan with their property), but they do not boost your serviceability in the lender’s calculation. The guarantor’s income isn’t considered towards your loan repayments – you still have to qualify on your own income. So from a borrowing power perspective, a guarantor doesn’t increase what you can borrow; it just covers the collateral shortfall so you can avoid LMI and possibly borrow 100% of the price. Now, a co-signer or co-borrower who is equally responsible for the loan (like a parent going on the loan as a co-borrower) would allow their income to be counted – but then they are on title and loan, which is a big commitment for them. Generally, banks prefer guarantor setup (where the parent only pledges security) to an actual co-borrower parent (unless the parent is actually going to live in or co-own the property). If you have a partner with income, making them a co-borrower absolutely helps because two incomes service easier than one. But that’s just applying jointly as a couple, standard practice. Some first home buyers might consider a joint purchase with a friend or sibling to afford something. In that case, yes, both incomes together increase borrowing capacity – but you both also share liability, and the bank will treat you as both responsible for the whole debt (and it can complicate things if down the road one wants out). Co-signing with anyone is not to be done lightly. In summary: A guarantor improves the LVR side (so you can borrow a higher percentage without needing serviceability buffer from them), but doesn’t increase the assessed income. A co-borrower brings income (increasing capacity) but also brings their expenses and complexities. It’s often better to maximize what you alone can borrow rather than leaning on someone else’s income, except in the case of spouses buying together which is normal. Guarantors are super useful for deposit gap, though – they can save you a lot of money on LMI, which indirectly keeps your loan lower.

Q: If interest rates go down in the future, will my borrowing capacity increase?
A: Generally, yes. If everything else remains equal, lower interest rates mean lower assessment rates (assuming the buffer is a constant margin). For example, if your rate drops from 5% to 4%, and buffer is 3%, the assessment rate drops from 8% to 7%. That lowers the hypothetical payment, meaning you could borrow a bit more for the same income. We saw this during periods of rate cuts – people’s borrowing capacities expanded. However, note that lenders and regulators can adjust other levers: APRA could change the buffer requirement (they did in late 2021, from 2.5% to 3%), which could counteract some rate-drop benefit. Or lenders might adjust HEM or other settings over time. But all else equal, a downward rate trend increases capacity, an upward trend decreases it. Importantly, if rates drop after you’ve gotten a loan, it doesn’t retroactively let you borrow more (you’d have to refinance or apply anew to see that benefit in a new loan application). Also, if you’re borrowing at the max and rates drop significantly, you might consider refinancing to borrow extra for renovations or an investment, because suddenly you could service a larger loan. Conversely, if rates rise further, capacity shrinks – which is why many have had lower budgets in 2023 compared to 2021. So yes, rate movements have a direct impact on that part of the equation. As of now (2025), if forecasts expect rates to stabilize or fall, then you might find borrowing power improve somewhat in coming years – but it’s speculation until policies actually change. Always use current rates to plan; any future change is a bonus if it happens.

Q: What if I disagree with the lender’s assessment or get a lower loan amount than I hoped?
A: If a lender comes back and says “we’ll approve $X which is lower than you wanted,” first find out why. It could be due to something in your financial profile that you might adjust. Ask them (or your broker) for the details: Was it your expenses too high? Was it a policy limit like DTI cap? Knowing the reason is key. If it’s something you can change (like paying off a debt or correcting an error in your application), you can do that and ask them to reassess. If you believe they misinterpreted something (for example, counted an expense twice, or missed some income), you can provide clarification and documentation. Lenders aren’t infallible – sometimes data entry or understanding of your situation might be wrong, so politely point it out and they may re-calc. If the lender simply has stricter criteria, you might try a different lender. This is where having a broker helps because they can quickly run your numbers through another bank’s calculator. Maybe Bank A said no but Bank B would say yes to the amount you need (due to differences we explained). There’s also something called appealing to the lender’s credit department – occasionally, if you’re very close, the bank might make an exception (like “okay, we’ll allow this loan with a slightly higher DTI because everything else is good”). These are case-by-case and not common at big banks unless there’s a very strong reason. A smaller lender might be more willing to bend. If all else fails and you truly can’t get the amount desired, you might need to adjust your plans: either increase deposit, look for a cheaper property, or take some time to improve your financials (as we discussed in tips). It’s frustrating, but lenders’ primary concern is that you don’t overextend. So take their feedback as useful insight. Work on any weak spots (credit, debt, spending). The good news is, you can often reapply in future when things have improved or try another lender’s fresh take. Also, consider non-bank options if a bank’s answer is final – some non-banks might approve the loan even if the bank didn’t, albeit maybe at a higher rate. Weigh the cost vs benefit (paying a slightly higher rate to get the home you want might be worth it, then refinance to a cheaper lender after a couple years if possible). In summary, don’t be discouraged – explore alternatives and see if there’s a solution in adjusting either your profile or the lender.

Q: Should I focus on getting the maximum loan or the best interest rate?
A: Ideally, both – but it’s a balance. If you need a certain amount to buy the property you want, that becomes a constraint: you might have to go with the lender that will lend that amount, even if their rate is a tad higher. On the other hand, if multiple lenders can lend you enough, then of course you’d choose the one with the best interest rate (and features/service). In many cases, the lender that gives the highest borrowing capacity might have a slightly higher rate or fees than a more conservative lender. You should crunch the numbers: sometimes taking a slightly higher rate to borrow $20k more is worth it if it gets you a much better property and you can refinance later. But if the rate difference is large, the long-term cost might outweigh the benefit of extra borrowing. A broker can often find a happy medium – maybe not the absolute highest loan amount, but the second highest which comes with a much better rate. Also consider your own affordability: just because someone will lend you say $600k at 6% doesn’t mean you should take it if another offers $550k at 5.5% – the latter might actually have a lower monthly payment due to rate difference, and perhaps $550k is enough. It comes down to your goals: Is it more important to maximize purchase price or to keep monthly costs low? For first home buyers, it’s usually a bit of both (you want enough to buy something decent, but you also don’t want to be mortgage-stressed). We often advise: get the house you’ll be happy with for a while, at a payment you can manage even if rates rise a bit more. If one lender offers a crazy low rate but not enough loan to buy anything suitable, that rate isn’t helpful. Conversely, a lender offering way more money but at a usurious rate is also not ideal. So find the sweet spot. And remember, you can refinance if conditions change or if you had to go with a higher-rate lender initially to get the loan – later you might move to a cheaper lender when your situation or lending rules improve (just be mindful of any fixed rate break costs or exit fees in the first couple years – most loans don’t have exit penalties beyond fixed, since exit fees on variable loans are banned for older loans now).

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We hope this comprehensive guide has helped clarify how lenders assess borrowing capacity in Australia. It’s a lot to digest, but knowing what’s happening behind the scenes empowers you to plan and strengthen your home loan application. The key takeaways: maximize your usable income, minimize your ongoing expenses and debts, and choose a lender whose policies align with your profile. Always keep an eye on your comfort level – borrowing capacity isn’t just about the bank’s formula, but about your life and goals.

When in doubt, seek advice and shop around. The difference between a “yes” and a “no” – or between affording your dream home or not – can often be found in the fine print of lender criteria or a few tweaks to your finances. With the right strategy (and perhaps a bit of expert help from a Fundd broker), you can put your best foot forward and secure a home loan that meets your needs.

Good luck on your home buying or investing journey! And remember, we’re here to help at every step – from crunching borrowing power numbers to getting that final approval. Feel free to reach out to Fundd for personalised guidance and make your property dreams a reality.