Your borrowing capacity depends on your income, expenses, debts, and the lender's assessment criteria. Here's exactly how it's calculated — and what you can do to improve it.
- Lenders assess serviceability — income, expenses, existing debts and credit limits — not just your salary.
- APRA requires lenders to test you at your rate plus a 3% buffer, which caps most borrowing well below the advertised rate.
- Cutting credit card limits and clearing small debts can lift capacity by tens of thousands overnight.
- Borrowing capacity varies significantly between lenders — a broker compares 40+ to find the strongest fit.
Understanding your borrowing capacity is one of the first and most important steps when planning to buy property in Australia. Lenders don't just look at how much you earn — they assess your entire financial picture, including what you spend, what you owe, and what might change in the future.
How Lenders Calculate Borrowing Capacity
Australian lenders use a process called serviceability assessment to determine how much they'll lend you. This involves:
1. Gross income assessment
Lenders assess your regular income — including salary, wages, rental income, government payments, and sometimes investment income. Not all income is assessed at 100%. Rental income, for example, is typically shaded to 70-80% by most lenders.
2. Committed expenses
Your existing financial commitments reduce your borrowing capacity. These include existing home loan or rent repayments, car loans and personal loans, credit card limits (the limit, not just the balance), buy-now-pay-later services like Afterpay, and child support or maintenance obligations.
3. Living expenses
Lenders use either your declared living expenses or the Household Expenditure Measure (HEM) benchmark — whichever is higher. HEM is a conservative estimate of minimum household spending based on your household size and location.
4. Stress testing
Lenders don't assess your ability to repay at today's rate. They stress test your application at a rate typically 3% higher than the loan's interest rate — a buffer imposed by APRA to ensure you can still service the loan if rates rise.
What Actually Affects Your Borrowing Capacity?
Several factors directly influence how much a lender is willing to offer:
- Your income level and stability — PAYG employees are typically assessed more straightforwardly than self-employed borrowers
- Number of dependants — Each dependent reduces your assessed living expenses allowance
- Existing debts — Paying off a credit card or personal loan before applying can meaningfully increase your borrowing capacity
- Credit card limits — Lenders count the full limit, not just what you owe. Reducing or cancelling unused cards helps
- Type of loan — Interest-only loans are assessed on a P&I basis by many lenders, reducing capacity
Practical Example
Consider a couple earning $180,000 combined, with no children, a $10,000 credit card limit (unused), and a car loan with $15,000 remaining.
At today's rates, their borrowing capacity might be in the range of $850,000-$1,000,000 — but this varies significantly between lenders. By paying off their car loan and reducing their credit card limit before applying, they could increase that capacity meaningfully.
How to Improve Your Borrowing Capacity
- Pay down and close unused credit cards and buy-now-pay-later accounts
- Clear existing personal loans or car finance where possible
- Avoid applying for new credit in the months before your home loan application
- Build a genuine savings history — lenders look for regular, consistent saving
- If self-employed, ensure your tax returns are up to date and reflect your actual income
Use our borrowing capacity calculator to get an estimate based on your own numbers.
Why Borrowing Capacity Varies Between Lenders
Not all lenders assess income and expenses the same way. Some lenders are significantly more generous than others, particularly for self-employed borrowers, those with rental income, and higher-income earners with substantial expenses.
This is why working with a mortgage broker — who can compare across 40+ lenders — makes a real difference. The right lender for your situation might offer $100,000-$200,000 more borrowing capacity than a lender you'd approach directly.
Getting Pre-Approval First
Once you understand your capacity, the smart next step is home loan pre-approval. Pre-approval gives you a confirmed borrowing limit before you start searching — so you know exactly what you can spend and can bid or make offers with confidence.
If you're a first home buyer, also check whether you qualify for the First Home Guarantee — a government scheme that lets eligible buyers purchase with just a 5% deposit, with no LMI payable. Moneysmart's borrowing calculator is another useful reference point.
Ready to find out exactly what you can borrow? Contact Sam for a free assessment across 40+ lenders.
Frequently Asked Questions
Can I borrow more by applying with a co-borrower?
Yes. Adding a co-borrower with income increases your combined borrowing capacity, though the lender will also assess their debts and commitments.
Does my borrowing capacity change if I'm self-employed?
Yes. Self-employed borrowers are assessed on their taxable income, typically averaged over two financial years. Using the right lender is important as policies vary significantly.
How quickly can I improve my borrowing capacity?
Paying off a personal loan or reducing a credit card limit can improve your capacity immediately. Building a savings history takes longer — typically 3-6 months of consistent deposits.
