Understanding how much you can borrow is the essential first step in any property purchase. Borrowing calculators give you a rough idea, but the actual figure depends on a complex interplay of your income, debts, expenses, and the specific lender’s assessment criteria. At Mortgage & Finance Advisory, we help borrowers across Geelong, the Surf Coast, Melbourne, and regional Victoria determine their true borrowing capacity and identify lenders who can maximise it based on their unique financial profile.
This guide explains exactly how lenders calculate your borrowing power, what factors increase or decrease it, and practical strategies for borrowing the most you can comfortably afford.
Lenders use a serviceability assessment to determine how much you can borrow. The core calculation is relatively simple: they take your assessable income, subtract your existing commitments and living expenses, and determine how much is left over to service a new loan, but at a stress-tested interest rate that’s 3% above the actual rate you’ll be paying.
Not all income is treated equally. Base salary (PAYG) is accepted at 100% by most lenders. Overtime and bonuses are typically shaded to 80% and require a 2-year history. Commission income may be assessed at 60-80% depending on the lender and your track record. Rental income from investment properties is assessed at 80% of market rent. Self-employed income uses the lower of the last 2 years’ tax returns (with some lenders averaging the two years instead).
Government payments like Family Tax Benefit and Centrelink income are accepted by some lenders but not others, and typically at reduced rates. Child support received may or may not be included depending on the age of the children and the lender’s policy.
Every existing financial commitment reduces your borrowing capacity. Lenders assess credit card limits at 3-3.8% of the total limit per month (regardless of your actual balance), existing home loans at the actual repayment (or a sensitised repayment), personal and car loans at the actual monthly repayment, HECS/HELP at the compulsory repayment percentage of your income, and buy-now-pay-later accounts (Afterpay, Zip) at 3-5% of the limit per month.
Lenders use the higher of your declared living expenses or the Household Expenditure Measure (HEM) benchmark for your household type. HEM represents a modest standard of living and is the absolute minimum most lenders will accept. If your declared expenses are higher (and they often are, particularly if you have private school fees, significant entertainment spending, or other lifestyle costs), the lender uses the higher figure.
APRA requires lenders to assess your ability to repay at an interest rate at least 3% above the actual loan rate. So if the actual rate is 6.19%, the lender tests whether you can afford repayments at 9.19%. This buffer protects borrowers from future rate increases but significantly reduces maximum borrowing amounts. When rates were at historic lows (2-3%), the buffer had a large impact. Even at current rates, it still reduces borrowing capacity by approximately 20-25% compared to what you could technically afford at the actual rate.
| Borrower Profile | Gross Income | Existing Debts | Approx. Borrowing Capacity |
|---|---|---|---|
| Single PAYG, no debts | $85,000 | None | $440,000 to $530,000 |
| Single PAYG, $20K HECS + $5K credit card | $100,000 | HECS + CC | $480,000 to $590,000 |
| Couple PAYG, no debts, no dependants | $180,000 combined | None | $850,000 to $1,050,000 |
| Couple, 2 dependants, car loan | $160,000 combined | $500/month car | $600,000 to $750,000 |
| Self-employed (sole trader) | $120,000 (tax return) | None | $520,000 to $680,000 |
Note: These are indicative ranges only. Actual borrowing capacity varies significantly between lenders and depends on factors beyond income and debts, including living expenses, loan type, and the specific lender’s serviceability calculator.
Understanding what reduces your capacity helps you take action before applying.
Credit card limits: Lenders assess the full limit of every credit card you hold, not your current balance. A $10,000 credit card limit reduces your borrowing capacity by approximately $35,000-$45,000, even if the card has a zero balance. Closing unused credit cards before applying is one of the quickest ways to boost your capacity.
HECS/HELP debt: The compulsory repayment is assessed as a committed expense. At an income of $100,000, HECS repayments of approximately $4,500 per year reduce your borrowing capacity by roughly $40,000-$50,000. You can’t avoid this unless you repay the HECS debt before applying.
Car loans and personal loans: Each $500 per month in existing loan repayments reduces your borrowing capacity by approximately $55,000-$65,000. If your car loan is nearly paid off, waiting until it’s fully discharged before applying can significantly boost your capacity.
Buy-now-pay-later: Most lenders now assess BNPL accounts. Even small Afterpay or Zip limits are assessed as committed expenses. Closing these accounts before applying is strongly recommended.
Dependants: Each child reduces your assessed surplus income due to higher living expense benchmarks. The impact varies by lender but generally ranges from $30,000-$50,000 per dependant reduction in borrowing capacity.
A couple in Geelong earning $165,000 combined were initially told by their bank they could only borrow $620,000. They had two credit cards (limits totalling $18,000), a $12,000 BNPL facility, and a car loan with 8 months remaining ($450/month). We recommended closing both credit cards, eliminating the BNPL account, and waiting two months for the car loan to reduce further. We then submitted their application to a lender with a more favourable serviceability calculator. Result: $785,000 borrowing capacity, $165,000 more than the original quote. This was the difference between missing out on the homes they wanted and buying with room to spare.
Clear unnecessary debts and credit facilities: Close all credit cards you don’t actively need. Pay off personal loans and car loans if possible. Eliminate BNPL accounts. Every dollar of committed expense you remove frees up borrowing capacity.
Reduce declared living expenses: Review your actual spending and reduce unnecessary expenses before applying. Lenders look at your bank statements for the last 3-6 months. Reducing subscription services, discretionary spending, and gambling transactions (which lenders flag) all help.
Consider your loan structure: An interest-only loan has lower assessed repayments than P&I, potentially increasing your borrowing capacity. Similarly, a longer loan term (30 years vs 25 years) reduces the per-month repayment and increases capacity.
Use the right lender: Different lenders’ serviceability calculators can produce vastly different results for the same borrower. Some lenders are more generous with overtime, bonus, and commission income. Others assess HECS differently or use lower expense benchmarks. A broker who knows the policies of multiple lenders can identify the one that maximises your specific capacity.
Not all income is treated equally by lenders. Understanding how your specific income sources are assessed helps you set realistic expectations and prepare the strongest possible application.
This is the simplest income type for lenders to assess. Your base salary is taken at 100% of its value, and most lenders will also include regular overtime (usually at 80% of the average over two years), commissions and bonuses (typically at 60-80% of the two-year average), allowances like car or phone allowances (often at 80-100%), and shift loadings if they’re regular and ongoing. The key is consistency: lenders want to see stable or growing income over at least 12-24 months. If you’ve recently changed jobs, some lenders will accept your new salary after the probation period, while others want 6-12 months in the new role.
Self-employed borrowers face additional scrutiny because their income can be more variable and is often structured to minimise tax (which simultaneously reduces borrowing power). Lenders typically assess self-employed income based on the last two years of tax returns and financial statements, looking at the average of the two years or the lower of the two. Common add-backs that can increase your assessable income include depreciation, one-off business expenses and director’s superannuation contributions. Some lenders also accept accountant declarations or BAS statements as supplementary evidence of income.
If you own investment properties, lenders will include a portion of your rental income in their assessment, typically 70-80% of the gross rental amount. The discount accounts for vacancy periods, management fees and maintenance costs. Having long-term tenants and strong rental histories improves how lenders view this income source.
Centrelink payments, Family Tax Benefits, child support and other government payments are accepted by some lenders but not all. Those that do accept them may discount the amount or require evidence that the payments will continue for a specified period. If government payments form a significant part of your household income, your broker can identify lenders with the most favourable policies.
Many borrowers are surprised to discover that certain financial commitments they consider minor can have a significant impact on their borrowing capacity. Lenders assess these commitments differently to how you might think about them in your day-to-day budget.
Credit card limits (not balances). Lenders assess the full credit limit of every credit card you hold, regardless of your current balance. A credit card with a $15,000 limit reduces your borrowing power by approximately $45,000-$60,000, even if you’ve never used it. If you have credit cards with limits higher than you need, reducing or cancelling them before applying can significantly boost your borrowing capacity.
HECS/HELP debt. Your HECS-HELP debt reduces your net income once it reaches the compulsory repayment threshold. A $30,000 HECS debt might reduce your borrowing power by $25,000-$40,000 depending on the lender and your income level.
Buy now, pay later services. Afterpay, Zip Pay and similar services are increasingly scrutinised by lenders. Active BNPL accounts or recent usage can reduce your borrowing power or even trigger a decline with some lenders. Pay off and close these accounts well before applying for a home loan.
Living expenses. Post-royal commission, lenders apply much stricter living expense assessments. They compare your declared expenses against the Household Expenditure Measure (HEM) benchmark and use the higher of the two. If your actual spending exceeds HEM, the lender will use your actual figure, which can significantly reduce your borrowing capacity. Reducing discretionary spending for 3-6 months before applying can improve your assessed position.
If your initial borrowing capacity assessment falls short of what you need, there are several legitimate strategies to improve your position.
Pay off personal debts. Car loans, personal loans and credit card balances directly reduce your borrowing power. Paying these off before applying frees up servicing capacity. Even paying off a $10,000 personal loan can increase your home loan borrowing power by $40,000-$60,000.
Reduce credit card limits. As mentioned above, it’s the limit that counts, not the balance. Reducing a $20,000 limit to $5,000 can add $45,000+ to your borrowing capacity.
Extend the loan term. A 30-year loan term has lower monthly repayments than a 25-year term, which means you can borrow more. While you’ll pay more interest over the life of the loan, you can always make extra payments to pay it off sooner once you’re in the property.
Use a guarantor. If a family member is willing to guarantee part of your loan using equity in their property, this can significantly increase your borrowing power and may also help you avoid LMI.
Choose the right lender. Different lenders calculate borrowing power differently. Some are more generous with overtime, bonuses and rental income assessments, while others use lower expense benchmarks. A broker who knows which lenders are most favourable for your income profile can often find $50,000-$100,000+ more borrowing power than your bank offered.
Online calculators use simplified assumptions and can’t account for every factor in your financial profile. They typically don’t accurately assess irregular income, may not apply the correct expense benchmarks, and can’t reflect individual lender policies. They’re useful for a rough guide but shouldn’t be relied on for actual planning.
Yes, self-employed borrowers are often assessed more conservatively. Lenders typically use the lower of the last 2 years’ net business income (not gross revenue), and some apply additional haircuts. Self-employed applicants also need to provide more documentation. However, some lenders are more favourable to self-employed borrowers than others, and a broker can identify the best options.
Yes, extending from a 25-year to a 30-year term reduces the monthly repayment and increases borrowing capacity. However, you’ll pay significantly more interest over the life of the loan. This can be a useful strategy if the extra capacity is needed to buy the right property, with the intention of making extra repayments to pay it off faster once your income grows.
It depends on the rental yield. If the investment property generates rental income that exceeds the loan repayments and holding costs, it can actually increase your borrowing capacity. If the property is negatively geared (expenses exceed income), it reduces your capacity. Lenders assess rental income at 80% of market rent and apply the serviceability buffer to the investment loan.
If you’re a PAYG employee, most lenders will accept a new employment contract or letter confirming a pay rise, even before you’ve received the higher salary in your bank account. This can be useful if you’ve recently received a promotion or accepted a new role at a higher salary. Ensure you have written evidence of the new salary.
We’ll calculate your precise borrowing capacity across multiple lenders and show you how to maximise it. Free assessment, no obligation.
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About the Author
Melanie McNaughton is the founder of Mortgage & Finance Advisory, helping home buyers across Geelong, the Surf Coast, Melbourne, and regional Victoria maximise their borrowing capacity and secure the best loan for their situation. With access to over 60 lenders, Melanie identifies which lender offers the highest capacity for each client’s unique financial profile.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
