One of the first questions almost every home buyer asks is: how much can I actually borrow? It sounds simple, but the answer depends on more variables than most people realise. This guide breaks down exactly how lenders calculate your borrowing capacity, the traps that catch people off guard, and practical steps you can take to improve your position.
How Lenders Calculate Borrowing Capacity
Banks and non-bank lenders don't just look at your salary and multiply it by a fixed number. They run a detailed assessment of your income, your existing commitments, and your living expenses, then they stress-test the result to make sure you could still make repayments if interest rates rose.
The core formula looks something like this:
Borrowing capacity = (Net assessable income − living expenses − existing debt repayments) ÷ assessment rate
Each of those variables has more depth than it first appears.
Assessable Income
Lenders don't always take your full income at face value:
- PAYG employees: Base salary is typically taken at 100%. Overtime, bonuses, and allowances may be taken at 80% or less, and usually need to be consistent over 12–24 months.
The HEM Benchmark
HEM stands for the Household Expenditure Measure, a quarterly benchmark produced by the Melbourne Institute. If your declared living expenses are lower than HEM for your household type and location, most lenders will use HEM instead. This is a floor, not a ceiling.
In practice, this means a single person living frugally in Springfield Central might declare $1,800/month in living costs, but the lender applies a higher HEM figure automatically. Families with children have an even higher benchmark applied.
Trying to understate your living expenses on an application doesn't help. The lender overrides low figures with HEM regardless.
The Assessment Rate Buffer (3%)
Since July 2021, APRA has required all lenders to assess whether you can afford repayments at your actual interest rate plus 3%. So if you're taking out a loan at 6.2%, the lender checks whether you could afford repayments at 9.2%.
This buffer was introduced to protect borrowers from rate rises and is one of the biggest limiters on borrowing capacity in the current environment. It is not negotiable with mainstream lenders.
The Impact of Existing Debts and Credit Cards
This is where many buyers are genuinely surprised:
Real Worked Examples
Example 1: Single Borrower
Example 2: Couple (No Children)
Example 3: Family with Children and Existing Debt
These figures are illustrative. Lenders use their own internal calculators and policies, and the spread between the most conservative and most generous lenders can be $100,000 or more for the same borrower.
How to Increase Your Borrowing Power
If your initial estimate falls short of your target purchase price, here are the most effective levers to pull:
1. Pay down or close credit cards and personal loans. This has an outsized effect because of how lenders treat limits and repayments.
2. Reduce your credit card limits. You don't have to close the card: just call your provider and reduce the limit to what you actually need.
3. Pay off your HECS debt faster if you're within a couple of years of clearing it. The reduction in assessed repayments can add meaningfully to your borrowing capacity.
4. Extend your loan term. Borrowing over 30 years rather than 25 years reduces the monthly repayment, which flows through to higher borrowing capacity. You can always pay extra later.
5. Add a co-borrower. A second income, even a part-time one, can lift capacity significantly.
6. Increase your income. A salary increase, taking on additional hours, or adding a reliable side income (documented for at least 12 months) will all help.
7. Choose the right lender. This is where a broker earns their value. Different lenders treat income types, credit cards, and living expenses very differently. The same borrower can have a $150,000+ difference in assessed capacity between lenders.
Self-Employed Considerations
If you run your own business, your borrowing capacity is assessed differently. Lenders average your net profit (after tax) across the last two years, and may add back certain deductions like depreciation. If your income has dropped recently, even temporarily, lenders will often use the lower figure.
Getting your tax returns in order and timing your application well (after a strong income year is assessed) can make a material difference. Some lenders also offer low-doc products for borrowers who can't provide full financials, though these typically come at a higher rate and require a lower LVR.
Conditional Pre-Approval vs Formal Approval
Conditional pre-approval (sometimes called "approval in principle") is an assessment of your borrowing capacity based on the documents you've provided. It gives you a budget to shop with but is not a guarantee of finance. It's subject to the property you choose being acceptable to the lender and no material changes to your situation.
Formal (unconditional) approval is issued after the lender has assessed both your financials and the specific property, including a valuation. This is the one that actually lets you proceed to settlement.
Don't sign a contract without at least conditional pre-approval in hand, and understand that pre-approval does expire (typically after 90 days).
Get an Accurate Figure
The calculators on bank websites are designed to be optimistic. For an honest, accurate borrowing capacity assessment across multiple lenders, not just one, the best step is to speak with a broker who can model your scenario properly.
Ready to find out your real borrowing power? Book a free call with Tom Smith at Kookaburra Finance and get an accurate figure based on your actual situation, not a website calculator.