Understanding how much you can borrow is the crucial first step in your property journey. This guide explains how lenders calculate your borrowing capacity and what you can do to maximize it.
How Lenders Calculate Borrowing Capacity
Lenders use a formula that considers your income, expenses, and existing debts. The goal is to ensure you can comfortably afford repayments.
Key Factors
- Gross income: Your total income before tax from all sources
- Living expenses: The higher of your declared expenses or HEM benchmarks
- Existing debts: Car loans, personal loans, HECS/HELP
- Credit card limits: Even if you don't use them!
- Dependants: Children increase expense allowances
The Assessment Rate Buffer
Lenders don't assess your ability to repay at the actual interest rate. They add a buffer (typically 3%) to ensure you can handle rate rises.
Example: If the loan rate is 6%, they'll assess at 9%.
This is why online calculators often show higher borrowing than what you actually qualify for.
The Credit Card Trap
Lenders assume you could max out your credit cards at any time. A $10,000 limit reduces your borrowing by approximately $50,000—even if the balance is zero. Close unused cards or reduce limits before applying.
Ways to Increase Your Borrowing Capacity
Reduce credit card limits: Cancel unused cards or lower limits
Pay off small debts: Clear personal loans and car finance
Reduce expenses: Cut discretionary spending in the months before applying
Joint application: Applying with a partner combines incomes
Choose the right lender: Different lenders have different policies
Longer loan term: 30 years vs 25 years increases capacity (but costs more long-term)
Single vs Joint Applications
Applying jointly typically increases borrowing capacity because:
- Two incomes are considered
- Living expenses don't double (economies of scale)
However, both applicants' debts and credit history are also considered.
Why Different Lenders Give Different Answers
Not all lenders calculate serviceability the same way. Differences include:
- How they treat overtime, bonuses, and commission
- Expense benchmarks used
- Treatment of rental income
- Credit score requirements
This is why using a broker matters—we know which lenders suit different situations.
What Doesn't Affect Borrowing Capacity
- Your savings (except for deposit purposes)
- Your age (within reason)
- Property location
- Property type (usually)
Next Steps
Want to know your actual borrowing capacity?
- Use our borrowing calculator for an estimate
- Book a free consultation for an accurate assessment
General information only, current as at 15 January 2025. It does not take your objectives, financial situation or needs into account. Grants, schemes, rates and lender policies change; check the figures that matter to you before you act, or speak with us. J2C Mortgage Advisory is Credit Representative 577408 of Australian Finance Group Ltd, Australian Credit Licence 389087.
