If you are starting to think about buying a home, one of the first questions you will ask yourself is how much can I borrow for a home loan. It seems like a simple question, but the answer depends on a fair bit more than just your salary. Lenders look at your income, your regular spending, your existing debts, and a few built in safety checks before they land on a number.
This guide walks through exactly how banks and lenders work out your borrowing power, what pushes that number up or down, and what you can do if you want to borrow more. If you would rather talk it through with someone, our Home Loans team can run the numbers for you directly.
Borrowing power is the maximum amount a lender is willing to let you borrow, based on your financial situation. It is not the same thing as what you can comfortably afford to repay each month. A lender might approve you for more than you would personally choose to borrow, because their calculation is based on risk, not on your day to day comfort with a repayment.
Think of it as a ceiling rather than a target. The bank works out the highest amount it believes you could repay under a range of conditions, including if interest rates were to rise. What you actually choose to borrow, and how big a mortgage you take on, is a separate decision that should factor in your own goals and lifestyle, not just the number a lender gives you.
Every lender runs a similar process, even if the exact numbers differ slightly from one bank to the next. Here is what goes into it.
Your income comes first. Lenders look at your gross salary, and depending on the lender, they may also count bonuses, overtime, rental income, or self employed earnings, though these are often discounted rather than counted in full. Rental income, for example, is commonly only counted at around eighty percent of its value, since the bank builds in a margin for vacancies and costs.
Living expenses come next. Rather than just asking what you spend, lenders compare your declared expenses against a benchmark called the Household Expenditure Measure, or HEM. If your actual expenses are lower than the HEM benchmark for your situation, the bank will usually still use the higher HEM figure. If your spending is higher than the benchmark, they use your real number instead. This is one of the more misunderstood parts of the process, since it means cutting your spending on paper does not always increase what you can borrow.
Existing debts matter a lot. This includes any other home loans, car loans, personal loans, and buy now pay later arrangements. Credit cards are assessed on their full limit, not your current balance, so a credit card with a ten thousand dollar limit is counted at ten thousand dollars even if you have paid it off in full every month.
Once income, expenses, and debts are accounted for, the lender applies a serviceability buffer to stress test the loan, which is explained in more detail below.
One of the biggest factors behind your borrowing power is something most people have never heard of until they apply for a loan. The Australian Prudential Regulation Authority, or APRA, requires all regulated lenders to check whether you could still afford your repayments if interest rates were three percentage points higher than what you are actually being offered.
So if you are offered a rate of six percent, the bank will test your ability to repay the loan at around nine percent. This buffer exists to make sure borrowers are not left in financial stress if rates rise after settlement, and it is a rule that applies across the board rather than something a bank can choose to skip. APRA has confirmed this setting is reviewed regularly, and you can read the regulator’s own explanation of why the buffer exists on the official APRA website.
The practical effect is that your approved loan amount will almost always be lower than a simple repayment calculation based on today’s rate would suggest. It is worth budgeting around your assessed figure rather than getting attached to a number based on current rates alone.
Alongside the serviceability buffer, there is now a second check that can affect how much you are able to borrow, particularly if you already carry other debt. This is your debt to income ratio, which compares your total debts, including your new mortgage, against your gross annual income.
As a general rule, a debt to income ratio of six times your income or higher is considered high by regulators. Banks are limited in how much of their overall lending they can approve at this level, which means if your ratio sits above six, you may find approval takes longer or your options narrow to lenders who still have capacity within their limits. This mostly affects people with significant existing debt or those buying in high priced markets relative to their income. First home buyers with little or no existing debt are usually well under this threshold, and new home purchases are typically exempt from the cap altogether.
A few other factors shape your final number, on top of income, expenses, debts, and the buffer.
Your deposit size matters, since it affects your loan to value ratio, or LVR. A bigger deposit means a smaller loan relative to the property value, which can open up better rates and avoid lenders mortgage insurance. If you are buying your first home with a smaller deposit, it is worth checking our First Home Buyer Loans page, since government schemes may reduce how much deposit you actually need.
Your employment type plays a role too. PAYG employees with a stable income history are usually the most straightforward to assess. Self employed applicants can still borrow just as much, but the process often requires more documentation, such as two years of tax returns, to establish a reliable income figure.
Your credit history is checked as well. A clean repayment history with no missed payments or defaults works in your favour, while a poor credit file can either reduce your borrowing power or limit which lenders are willing to approve your application.
Dependants reduce your borrowing power, since the HEM benchmark increases with each additional person relying on your income. This is a normal part of the calculation and not something to worry about, but it does explain why two households with identical incomes can be offered different loan amounts.
It is common to get quite different borrowing power figures from different banks, even when you provide the exact same information. This happens because each lender sets its own internal policies within the rules set by APRA. Some use a slightly higher buffer than the required minimum, some treat rental income or bonuses differently, and some are more conservative with self employed applicants.
This is really the main reason people use a broker rather than applying directly to one bank. Comparing your situation across a panel of lenders means you are more likely to find one whose policies actually work in your favour, rather than assuming the first number you are given is the best one available.
If your borrowing power estimate is lower than you were hoping for, there are a few practical ways to improve it.
Paying down or closing unused credit cards can help, since every dollar of available credit limit counts against you even if the card has a zero balance. Reducing other debts, such as car loans or personal loans, frees up more of your income for a mortgage in the lender’s calculation. Choosing a lower rate loan also helps directly, since a lower rate means a lower assessment rate once the buffer is applied.
Applying with a partner or co borrower can increase your combined borrowing power, since two incomes are assessed together. Saving a larger deposit reduces your loan to value ratio and can improve your options, and in some cases, reviewing how your expenses are recorded can make a difference if your declared spending is unusually high in categories that are easy to bring down.
The numbers above give you a solid understanding of how the process works, but every application is different. The most reliable way to know your actual borrowing power is to run your real numbers, rather than relying on rules of thumb.
You can get a quick indication using our Credit Calculators, or speak directly with our team for a proper assessment across our lender panel. Contact us for a free, no obligation conversation about what you can borrow and what loan structure actually suits your situation.
FAQs
There is no simple multiple of your salary that applies to everyone, since lenders also factor in your expenses, existing debts, dependants, and the interest rate buffer. Two people on the same income can be approved for very different amounts.
The most common reasons are the serviceability buffer, which tests you at a higher rate than you will actually pay, and living expenses being assessed against the HEM benchmark rather than your actual spending.
Yes. Lenders count the full limit on your credit cards, not your current balance, so even a card you rarely use can reduce your borrowing power.
A broker cannot change the rules that apply to each lender, but comparing your situation across a wider panel often finds a lender whose policies suit you better than the first bank you approach.
Since your approved amount is based on an assessment rate that includes a buffer above the actual loan rate, changes in interest rates can affect how much you are approved to borrow over time.
DISCLAIMER
This article is general information only and does not take into account your personal financial situation. Lending criteria, government settings and interest rates change over time and vary between lenders. Speak with one of our brokers for advice specific to your circumstances. Lodestar Finance is a credit representative (571879) of Purple Circle Financial Services Pty Ltd, Australian Credit Licence 486112.
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