How Much Can I Borrow for a Home Loan?

At its core, every lender's borrowing capacity calculation answers the same question: can this borrower comfortably afford the loan repayments after their other commitments and living expenses? The formula looks roughly like this: Net monthly income (after tax) – Existing debt repayments (assessed at higher stressed levels) – Living expenses (greater of declared expenses or HEM benchmark) – Buffer for the new loan repayments at an assessed rate (the actual rate plus the APRA buffer) = Surplus available If your surplus is positive at the assessed repayment level, the lender will approve the loan. If it is negative, the loan amount drops until the maths works. This is why two borrowers earning the same income can have wildly different borrowing capacities. One has a car loan and a credit card. The other has neither but three children. One pays $400 a week in rent. The other lives at home. Lender policies treat these inputs differently, and that is where a broker's value compounds: choosing the lender whose policy treats your specific situation most favourably.

Lenders do not simply look at your gross salary. They categorise every dollar of income and apply different shading based on how reliable that income is. Base salary (PAYG, full-time, ongoing) is generally taken at 100%. Most lenders need to see at least 3 to 6 months in your current role, although exceptions exist for new roles in the same industry. Overtime, shift loadings and allowances are usually shaded to between 80% and 100%, and most lenders want to see at least 12 months of consistent overtime before they include it. Bonuses and commissions are typically averaged over the last one or two years and shaded to 80%. Self-employed income is assessed on the lower of the last two years of net business profit, although some lenders accept the most recent year if the trend is up. Add-backs for depreciation, interest and one-off expenses can be argued. Rental income from existing properties is generally taken at 80% (to allow for vacancy and costs) and net of expected expenses. New rental income from a proposed investment purchase is treated similarly. Government payments (Family Tax Benefit, Carer Payment) are accepted by some lenders if the children are young enough that the payments will continue for the loan assessment period. Others exclude them entirely. Matching your income mix to the right lender is one of the highest-impact moves a broker can make.

Lenders assess your living expenses against the Household Expenditure Measure (HEM), an indexed benchmark of typical Australian household spending published quarterly by the Melbourne Institute. HEM varies by household composition, postcode and income. Here is the key rule: lenders use the higher of your declared expenses or HEM. If you declare lower expenses than HEM suggests is realistic for your household, the lender uses HEM anyway. There is no benefit to under-declaring. What does count is the categories you may genuinely not have. School fees, private health insurance, life insurance premiums, gym memberships and streaming subscriptions are all routinely captured. Lenders pull 3 to 6 months of bank statements and look for recurring outflows. What helps is cleaning up the months immediately before your application. Spending on UberEats, gambling apps, BNPL services (Afterpay, ZipPay) and large discretionary purchases all show up and reduce borrowing capacity. A buyer who tightens spending for three months before applying typically borrows $30,000 to $80,000 more than the same buyer would have without that discipline. This is not about hiding spending — it is about presenting an accurate picture of your sustainable lifestyle, not your worst months.

Existing debts have an outsized effect on borrowing capacity because of how lenders assess them. They do not just count the actual repayment. They count a stressed repayment, often based on a higher rate or a shorter term. Credit cards are assessed on the limit, not the balance. A $20,000 credit card with a $0 balance is treated as a $400 to $600 monthly commitment in the lender's calculation. Closing or reducing unused credit card limits before applying is one of the fastest ways to lift borrowing capacity. Car loans, personal loans and BNPL accounts are assessed on the actual repayment, but the assumed monthly amount can be higher than what you are paying if the lender stresses the rate. Paying out a small personal loan can lift borrowing capacity by $40,000 to $80,000. HECS-HELP debts are treated as a fixed deduction from gross income based on your income band. The deduction is real and cannot be removed (other than by paying off the debt), but it is at least predictable. Existing investment property loans are assessed using both the actual repayment and the rental income at 80%. Negative gearing benefits are generally not added back into borrowing capacity, even though they are real cash flow.

The Australian Prudential Regulation Authority (APRA) requires lenders to assess your loan at an interest rate that is at least 3 percentage points higher than the rate you will actually pay. This is the serviceability buffer, set at 3% in October 2021 and maintained since then. In practical terms, if your loan rate is 6.0%, the lender assesses your repayments as if you were paying 9.0%. On a $700,000 loan over 30 years, that is the difference between roughly $4,200 and $5,640 in monthly repayments — a $1,440 a month gap that has to fit inside your assessed surplus. The buffer is the single biggest constraint on borrowing capacity in the current market. It is also the reason borrowing capacity has fallen even when interest rates fall slightly: a small drop in the base rate moves the assessed rate by the same amount, but the 3% buffer remains. A handful of lenders use a slightly lower buffer (around 1% to 2%) for refinance applications where the borrower is moving from one lender to another with no increase in the loan amount. This 'streamlined' refinancing pathway has helped many existing borrowers escape rates that would otherwise lock them into their current lender.

Each dependant in your household reduces your assessed surplus through the HEM benchmark. The exact reduction depends on the lender, but you can expect each child to reduce borrowing capacity by roughly $30,000 to $80,000. This is not because lenders dislike children. It is because HEM data shows that a household with two adults and two children genuinely spends more on food, transport, utilities and recreation than a couple with no children. The lender is required to reflect that. What matters is who counts as a dependant. A child who has left home and is financially independent does not. An adult child living at home and working may or may not, depending on the lender. A partner not on the loan but contributing income complicates the picture (some lenders take their income into account through a 'joint applicant' structure, others do not). If you have a more complex household, getting borrowing capacity assessed by multiple lenders before you apply formally is essential. The variance is significant.

Take a hypothetical couple, Alex and Sam, with the following profile: • Combined gross income: $180,000 ($110,000 + $70,000) • No dependants • One car loan with $350 monthly repayment • Combined credit card limits of $15,000 (zero balance) • Living expenses: $4,500 per month declared • Looking at a $750,000 owner-occupier purchase, P&I, 30 years, 6.1% rate A typical lender's assessment: • Net monthly income (after tax): around $11,500 • Less car loan: -$350 • Less credit card minimum (assessed): -$450 • Less HEM/declared expenses: -$4,800 (HEM benchmark slightly above declared) • Available for new loan repayments: around $5,900 • Assessed at 9.1% (6.1% + 3% buffer), this services a loan of around $660,000 to $700,000 If they cancel the credit cards (saving $450/month in assessed commitments), borrowing capacity moves up by approximately $60,000. If they pay out the car loan, another $40,000 to $50,000. The same couple, the same income, two simple actions, and they can afford a noticeably better property.

Practical levers, in order of impact: • Reduce or close credit card limits you do not use • Pay out small personal and car loans • Avoid BNPL accounts in the months before applying • Tighten discretionary spending for 3 months pre-application • Choose the right lender for your income mix (PAYG vs self-employed vs commission) • Extend the loan term to 30 years if you currently have a 25-year setup • Apply jointly with a partner whose income is otherwise idle • Wait until you have completed a probation period in a new role • Consider a fixed/variable split if it gives you access to a sharper assessment rate at one lender What does not work: declaring artificially low expenses (the lender will use HEM), padding income (the lender verifies through payslips and tax returns), or hiding existing debts (they show up on your credit file).

Borrowing capacity is the most lender-specific number in the entire mortgage process. The same financial profile can produce different results across 5, 10 or 20 lenders, and the right lender for your situation is rarely the lender you already bank with. This guide is general information only and does not constitute personal credit advice. For advice tailored to your situation, including a multi-lender borrowing capacity comparison, speak with a licensed mortgage broker.