Borrowing Power

Borrowing power — or borrowing capacity — is the maximum amount a lender will allow you to borrow based on your financial position. Understanding how it’s calculated helps you plan your property purchase, identify ways to increase it, and avoid the frustration of applying for more than lenders will approve.

This guide explains every major factor that affects borrowing power for Australian home loan applicants. For personalised advice, speak to a Lagos Financial broker who can model your capacity across 60+ lenders. See also: home loans, self-employed home loans, and our 2026 borrowing guide.

How Lenders Calculate Borrowing Capacity

Every lender has a serviceability model — a formula that determines whether you can afford the loan you’re applying for. While models differ between lenders, all Australian ADIs (authorised deposit-taking institutions) must comply with APRA’s serviceability guidelines.

Income Assessment

PAYG (Salary) Income

For salaried employees, lenders typically use 100% of base salary and 80% of regular overtime, casual earnings, or allowances (since these are considered less certain). Bonuses may be included at 50–80% if you have at least 2 years of history showing consistent receipt.

Self-Employed Income

Self-employed borrowers — sole traders, company directors, and partners — are generally assessed on an average of the last 2 years of net profit after tax (from tax returns and business financials). Some lenders will use only the most recent year if income is trending upward; others use the lower of the two years. For advice specific to self-employed borrowers, see our self-employed home loans guide.

Rental Income

Rental income from investment properties is generally shaded to 70–80% of actual rent by most lenders to account for vacancy periods and property management costs. Some lenders use a net rental figure (gross rent minus expenses) from your tax return.

Expense Assessment — HEM vs Actual Expenses

One of the most significant factors in borrowing power is how your living expenses are assessed. Lenders use either your declared actual expenses or the Household Expenditure Measure (HEM) — whichever is higher.

HEM is a benchmark developed by the Melbourne Institute that estimates reasonable minimum living expenses for different household types. As at early 2026, HEM figures range from approximately $2,200/month for a single person to $4,500–$6,000/month for a family with children, depending on income level and postcode.

If your declared expenses are below HEM, the lender uses HEM. This prevents borrowers from understating expenses to inflate borrowing capacity — a practice APRA and ASIC have specifically targeted since the Banking Royal Commission.

Existing Debts

All existing financial commitments reduce borrowing power by reducing your net surplus income:

Credit cards: Assessed on the full credit limit (not just the outstanding balance). A $20,000 credit card limit may reduce borrowing power by $80,000–$100,000, depending on the lender’s assessment rate.
HECS-HELP debt: Compulsory HECS repayments are deducted from assessable income. At a $70,000 salary, the HECS repayment threshold triggers a 2.5–3% annual deduction — approximately $1,750–$2,100/year.
Car loans and personal loans: The monthly repayment amount is used in the serviceability calculation, directly reducing surplus income.
Buy Now Pay Later (BNPL): Many lenders now include BNPL commitments (Afterpay, Zip) in serviceability assessments if visible on bank statements.

APRA 3% Serviceability Buffer

Since 2021, APRA requires all APRA-regulated lenders to assess whether borrowers can service their loan at the actual rate plus 3%. If you’re applying for a loan at 6.0% p.a., the lender must test your ability to repay at 9.0% p.a. This buffer is designed to ensure borrowers can withstand future rate rises.

The buffer materially reduces borrowing power. A borrower who could service $850,000 at 6.0% p.a. may only qualify for $620,000–$680,000 when the buffer is applied. Non-bank lenders (not regulated by APRA) are not required to apply this buffer, which is one reason some borrowers find higher capacity through non-bank lenders — though at potentially higher rates.

Debt-to-Income Ratio (DTI)

In addition to serviceability, many major lenders now apply a debt-to-income cap of approximately 6× total gross income. If your combined household income is $180,000, this cap limits total debt (including all existing debts and the proposed loan) to around $1,080,000. The DTI cap can bind before the serviceability buffer for high-earning borrowers in high-cost markets.

How to Increase Your Borrowing Power

Reduce or close credit card limits: Even unused limits count against you. Reducing a $25,000 limit to $5,000 before applying can add $60,000–$80,000 to your borrowing capacity.
Pay down personal loans and car loans: Eliminating a $500/month car loan repayment typically adds $50,000–$80,000 to capacity.
Declare all income sources: Ensure rental income, dividends, government payments, and bonus income are all documented and declared.
Add a co-borrower: Including a partner or co-borrower with income on the application adds their income to the assessment (while also adding their liabilities).
Choose the right lender: Different lenders apply HEM at different rates and treat income types differently. A broker can model your scenario across multiple lenders to find the highest genuine approval.
Reduce BNPL and discretionary spending on statements: Lenders review 3 months of bank statements before application. Reducing visible discretionary spending can improve your profile.

Frequently Asked Questions

How accurate are online borrowing power calculators?

Online calculators — including those on lender websites — are indicative only. They typically don’t account for HEM benchmarks, the APRA 3% buffer, existing debt obligations, or lender-specific policy variations. They may overestimate your capacity by 10–30%. A broker can give you an accurate assessment using actual serviceability models.

Does my borrowing power change between lenders?

Yes — significantly. Income treatment, HEM rates, credit card assessment rates, and DTI caps all vary between lenders. A borrower approved for $800,000 at one lender may be approved for $900,000 at another. This is one of the key reasons to use a broker who can compare across multiple lenders.

How does a lower deposit affect borrowing power?

A smaller deposit doesn’t directly reduce your maximum loan amount — but if your LVR exceeds 80%, LMI is added to the loan (or paid upfront). LMI does not restrict borrowing power, but it adds cost. APRA’s serviceability rules still apply at any LVR.

Can I improve my borrowing power quickly before applying?

Yes. The fastest wins are: closing unused credit cards, paying down personal debt, and ensuring your tax returns are lodged and up to date (especially if self-employed). Allow 1–3 months between these actions and your application so lenders can see current balances on credit reports and statements.

Get Expert Advice from Lagos Financial

With close to 20 years of experience and access to 60+ lenders, Victor Lagos and the Lagos Financial team can help you find the right loan for your situation. Book a free assessment or call us to discuss your options.

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About the Author
Victor Lagos is a licensed mortgage broker (ACL 546774) and founder of Lagos Financial, with close to 20 years of finance industry experience since beginning his career at Bluestone Mortgages in 2006. A member of the Finance Brokers Association of Australia (FBAA) since 2015 and the Australian Financial Complaints Authority (AFCA — 98399), Victor helps Australians build wealth through tailored home loan and property investment strategies, working with 60+ lenders nationwide. Last reviewed: March 2026.

Borrowing Power | How Much Can You Borrow?