Key Takeaways
- Borrowing power varies significantly between lenders - the same person can have a $100K+ difference
- Lenders assess your income, debts, expenses, and apply a buffer rate (typically 3% above actual)
- Credit cards reduce borrowing power by the full limit, not just the balance owing
- HECS/HELP, car loans, and afterpay all reduce your capacity
- Different income types (overtime, bonuses, rental) are treated differently by each lender
- A mortgage broker can compare lenders to find the best borrowing capacity for you
Understanding your borrowing power is the essential first step in your property journey. How much you can borrow determines your price range and the properties available to you.
At Mortgage and Finance Advisory, we help clients understand and maximise their borrowing capacity. The right lender choice can mean tens of thousands of dollars more in borrowing power - or approval where others decline.
What Lenders Assess
Lenders evaluate several factors when calculating how much they will lend you. Understanding these factors helps you prepare and potentially improve your position.
Income
Your primary income is the foundation. Lenders also consider secondary income like overtime, bonuses, commissions, and rental income - but each lender treats these differently. Some accept 100% of overtime, others only 50% or none at all.
Existing Debts
All existing debts reduce your borrowing power. This includes home loans, car loans, personal loans, HECS/HELP, credit cards (at full limit), and buy-now-pay-later accounts like Afterpay.
Living Expenses
Lenders assess your living expenses using either your declared expenses or a benchmark figure (HEM or similar), whichever is higher. Bank statement analysis is common, so your spending patterns matter.
Buffer Rate
Lenders do not assess you at the actual interest rate. They apply a buffer (typically 3%) to ensure you can afford repayments if rates rise. A loan at 6% is assessed as if the rate were 9%.
Credit Card Warning
A $20,000 credit card limit reduces your borrowing power by approximately $60,000-$100,000 - even if you pay it off monthly. Close unused cards before applying for a home loan.
How to Increase Borrowing Power
There are several strategies to improve your borrowing capacity. Pay off or reduce existing debts, especially credit cards and personal loans. Close unused credit cards completely. Reduce discretionary spending that appears on bank statements. Consider a longer loan term (30 years vs 25). Add a co-borrower such as a partner or family member. Wait for salary increases before applying.
Why Lender Choice Matters
Different lenders can offer dramatically different borrowing amounts. One bank might offer $650,000 while another offers $750,000 to the same borrower. This happens because lenders assess income types differently, use different expense benchmarks, apply different buffer rates, and have unique policies for various employment types.
Example: A client with significant overtime income was offered $580,000 by their current bank. By switching to a lender that accepted 100% of overtime (instead of 50%), we achieved approval for $720,000 - a $140,000 difference.
Frequently Asked Questions
Lenders assess your income, existing debts, living expenses, and apply a buffer rate (typically 3% above the actual rate). They calculate whether you can afford repayments at this higher rate. Each lender has different policies, which is why borrowing power varies between banks.
Each lender has unique credit policies. They assess income types differently (some accept more overtime or bonuses), use different expense benchmarks, and apply various buffer rates. A broker compares lenders to find the best fit for your situation.
Pay off or reduce existing debts especially credit cards, reduce unnecessary expenses that appear on bank statements, consider a longer loan term, add a co-borrower, or wait for salary increases. Closing unused credit cards also helps as lenders assess the full limit.
Yes, significantly. Lenders assess the full credit limit (not just the balance) as a potential liability. A $20,000 credit card limit reduces borrowing power by approximately $60,000-$100,000 depending on the lender.
Yes. HECS repayments are deducted from your income before calculating borrowing power. The impact depends on your income level and repayment threshold.
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