How Is Borrowing Capacity Calculated in Australia?

A bigger salary does not always mean you can borrow more.

In fact, two people earning the same income can have very different borrowing capacities.

Why?

Because lenders look beyond your pay packet. They examine your debts, expenses, dependants and ability to handle higher repayments.

Then they test whether your finances could withstand financial pressure.

So, how does borrowing capacity work in Australia?

It starts with one simple question.

Can you comfortably afford the proposed home loan under the lender’s assessment rules?

That answer depends on several moving parts.

What Is Borrowing Capacity?

Your borrowing capacity is an estimate of how much a lender may allow you to borrow.

It is sometimes called borrowing power.

However, borrowing capacity is not the same as loan approval.

A lender can calculate your potential borrowing amount before completing a full assessment.

The final loan decision can depend on additional factors, including the property, documentation and lender-specific policies.

ASIC requires credit licensees to make reasonable inquiries about your financial situation. They must also verify relevant information and assess whether the loan is unsuitable. 

That means lenders cannot simply look at your income and multiply it by a fixed number.

Instead, they assess your overall financial position.

How Does Borrowing Capacity Work?

Think of borrowing capacity as a financial balancing act.

Money comes in through your income.

Money goes out through living expenses and existing commitments.

Your proposed home loan then needs to fit within what remains.

But there is another twist.

Lenders generally do not assess your proposed mortgage using only today’s loan interest rate.

They also test whether you could handle higher repayments.

This is where the serviceability assessment becomes important.

The Main Factors That Affect Borrowing Capacity

Several factors can change the amount you may be able to borrow.

These commonly include:

• Your income
• Your living expenses
• Your existing debts
• Your credit card limits
• Your dependants
• Your employment situation
• Your proposed loan amount
• The loan term
• The interest rate used for assessment
• Your other financial commitments

A change in just one area can affect the final calculation.

For example, reducing an existing debt may improve your borrowing capacity.

Likewise, higher living expenses can reduce the amount a lender considers affordable.

ASIC’s responsible lending framework requires lenders to make reasonable inquiries and take reasonable steps to verify a consumer’s financial situation. 

Step 1: Your Income Is Assessed

The calculation starts with the money coming into your household.

Depending on your circumstances, this can include employment income and other acceptable income sources.

Lenders may assess different types of income differently.

For example, variable income can require additional evidence or a specific assessment approach.

Your employment situation can also matter.

A stable and verifiable income generally gives the lender more information about your ability to meet repayments.

Moneysmart says lenders consider income, expenses, debts and employment when assessing whether someone can manage a home loan.

The key point is simple.

Your gross salary alone does not determine your borrowing capacity.

The lender needs to understand how much income remains available after your financial commitments.

Step 2: Your Living Expenses Are Calculated

This is where things become more interesting.

Lenders need to estimate how much your household costs to run.

That can include expenses such as:

• Groceries
• Utilities
• Transport
• Insurance
• Education
• Medical costs
• Entertainment
• Clothing
• Childcare
• Rent
• Other regular household expenses

Your spending matters because every dollar committed to living costs leaves less money available for loan repayments.

However, lenders do not always rely solely on the spending figure you provide.

They can also use expense benchmarks.

One important benchmark is the Household Expenditure Measure, commonly called HEM.

What Is HEM?

HEM stands for Household Expenditure Measure.

It is a benchmark used by lenders when estimating household living expenses.

HEM considers factors such as household size and income.

However, HEM is not simply a standard amount that every lender must use.

APRA’s residential mortgage lending guidance says lenders commonly use HEM or the Henderson Poverty Index when estimating living expenses. 

Importantly, APRA expects lenders to consider actual declared expenses.

Lenders should generally use the greater of declared expenses or an appropriately scaled benchmark.

This prevents a low benchmark from automatically replacing higher actual spending. 

Why HEM Matters

Imagine your household spending is higher than the relevant benchmark.

A lender cannot simply assume that you spend less because the benchmark says so.

Your actual expenses can therefore affect the serviceability calculation.

This is one reason your borrowing capacity can differ between lenders.

Different lenders can have different policies for assessing expenses and income.

As a result, the same financial information can produce different borrowing capacity estimates.

Step 3: Existing Debts Reduce Borrowing Capacity

Next comes your existing debt.

This includes commitments such as:

• Personal loans
• Car loans
• Credit cards
• Student debt
• Buy now, pay later commitments
• Existing home loans
• Other ongoing credit commitments

These debts matter because lenders must consider your existing repayment obligations.

A credit card can also affect borrowing capacity even if you rarely use it.

The lender may consider the credit limit when assessing your potential repayment commitments.

That means an unused credit card limit can still affect your assessment.

Reducing unnecessary credit limits may therefore change your borrowing capacity.

However, you should consider the broader consequences before changing any financial product.

Step 4: Your Living Expenses and Debts Are Combined

Now the lender starts putting the pieces together.

Your income provides the starting point.

Your living expenses reduce the available income.

Existing debt commitments reduce it further.

The proposed home loan then needs to fit within the remaining capacity.

This creates an important distinction.

Your household budget may show that you can afford a particular repayment.

The lender’s serviceability assessment may produce a different result.

That is because the lender applies its own assessment methodology and regulatory requirements.

Step 5: The Interest Rate Buffer Changes the Calculation

This is one of the biggest reasons borrowing capacity can surprise people.

APRA currently requires APRA-regulated banks to apply a mortgage serviceability buffer of at least three percentage points (3%). APRA confirmed the buffer remained at 3 percentage points in May 2026. 

In simple terms, the lender does not only ask:

Can you afford the loan at the proposed interest rate?

It also asks:

Could you still afford the repayments if the assessed rate were higher?

For example, imagine a hypothetical loan with a 6% product rate.

A bank applying a 3 percentage point buffer would assess serviceability at 9%.

This does not mean you would necessarily pay 9%.

It means the lender uses the higher assessment rate when testing your ability to service the loan.

APRA says the buffer provides a margin against potential increases in interest rates, expenses or reductions in income. 

Why the Buffer Matters

The buffer can significantly affect borrowing power.

A higher assessment rate produces higher assessed repayments.

Higher assessed repayments leave less surplus income.

That can reduce the maximum loan amount a lender considers affordable.

This is why falling or rising actual home loan rates do not always translate directly into borrowing capacity.

The assessment also depends on the serviceability rate.

Step 6: The Loan Term Affects Borrowing Capacity

The proposed loan term can also influence the borrowing capacity calculation.

A longer loan term generally spreads repayments over more years.

That can change the repayment amount used in the assessment.

However, lenders still apply their own policies around maximum loan terms and borrower circumstances.

The loan structure can also matter.

For example, interest-only lending requires consideration of the repayments that may apply after the interest-only period.

Step 7: Your Dependants Can Affect the Result

Children and other financial dependants can affect your borrowing capacity.

Why?

Because supporting a larger household generally creates higher living costs.

Those additional costs reduce the income available for mortgage repayments.

The effect depends on your household circumstances and the lender’s assessment methodology.

This is another reason why two households with identical incomes can receive different borrowing capacity results.

Step 8: Your Debt-to-Income Position Can Matter

Lenders may also consider how large your debts are compared with your income.

This is commonly expressed as a debt-to-income ratio, or DTI.

For example, someone earning $100,000 with $500,000 of total debt has a DTI of 5.

APRA introduced a DTI lending limit from February 2026. Banks must limit lending at DTI ratios of six or more to 20% of new residential mortgage lending. 

This does not mean every borrower with a DTI of six cannot receive a loan.

However, it can influence lender policies and the availability of higher-DTI lending.

Therefore, your total debt can become increasingly important as your proposed borrowing rises.

A Simple Example of Borrowing Capacity

Consider a hypothetical household earning $150,000 a year.

They have:

• No existing home loan
• A $10,000 personal loan
• A $15,000 credit card limit
• Two dependants
• Regular household living expenses

Their income may look strong at first.

However, the lender does not assess the salary in isolation.

It considers their existing commitments and household expenses.

Then it assesses the proposed mortgage using the applicable serviceability rate.

The result is the maximum loan amount that fits the lender’s assessment model.

Another household earning the same $150,000 could receive a different result.

Perhaps they have no personal loan and fewer ongoing expenses.

Their assessed borrowing capacity could therefore differ.

This demonstrates an important point.

There is no single borrowing capacity figure that applies to everyone earning the same income.

Why Borrowing Capacity Can Differ Between Lenders

You might enter identical information into two borrowing capacity calculators.

The results may still differ.

That does not necessarily mean one calculation is wrong.

Lenders can have different credit policies and assessment methods.

They may treat certain income types differently.

They may also assess expenses, debts and other commitments differently.

APRA sets prudential requirements for APRA-regulated lenders.

Individual lenders then apply their own lending policies within those requirements. 

This explains why an online calculator should be treated as an estimate.

It cannot guarantee a particular loan amount.

What Can Reduce Your Borrowing Capacity?

Several financial commitments can reduce your borrowing capacity.

Common examples include:

• High credit card limits
• Personal loans
• Car finance
• Existing mortgages
• Higher household expenses
• Multiple dependants
• Large buy now, pay later commitments
• Irregular or difficult-to-verify income
• High overall debt levels

The impact depends on the lender and your circumstances.

However, the underlying principle remains consistent.

The more income already committed to expenses and debt, the less remains for a new mortgage.

What Can Increase Your Borrowing Capacity?

The opposite can also apply.

Factors that may improve your borrowing capacity can include:

• Higher sustainable income
• Lower existing debt
• Lower ongoing commitments
• Lower credit card limits
• Reduced household expenses
• Fewer financial dependants
• A longer acceptable loan term

However, reducing expenses purely to increase borrowing capacity requires care.

Your actual household budget still needs to support the mortgage.

A larger approved loan does not automatically mean a more comfortable financial position.

Borrowing Capacity vs Loan Approval

These two terms are often confused.

They describe different stages of the lending process.

Borrowing capacity	Loan approval
An estimate of how much you may be able to borrow.	A lender’s decision to approve your application.
Based on income, expenses, debts and other financial information.	Based on your full application and the lender’s lending criteria.
Helps you understand your potential borrowing range.	Confirms the lender’s decision subject to its conditions.
Can be estimated before you find a property.	Usually follows a more detailed assessment process.

Your borrowing power therefore provides an indication.

It does not guarantee approval.

How Much Borrowing Capacity Do I Have?

If you are asking, how much borrowing capacity do I have, start with your complete financial picture.

Gather information about:

• Your gross and net income
• Employment income and other income
• Existing loan balances
• Credit card limits
• Buy now, pay later commitments
• Regular household expenses
• Rent or current housing costs
• Dependants
• Other financial commitments

Then consider how the proposed home loan would fit into your budget.

An online calculator can provide an initial estimate.

However, it cannot fully replicate a lender’s assessment.

The final figure depends on the lender, your circumstances and the assessment criteria that apply.

Conclusion – The Bottom Line About Borrowing Capacity

So, how does borrowing capacity work?

It starts with your income.

Then the lender subtracts your existing commitments and assessed living expenses.

Next, it tests the proposed mortgage using the applicable serviceability requirements.

The 3 percentage point APRA serviceability buffer is a key part of assessments by APRA-regulated banks.

HEM can also form part of the living expense assessment.

However, lenders must consider actual expenses rather than relying blindly on a benchmark.

Finally, your debts, dependants, income type and lender policies can change the result.

That is why borrowing power is personal.

The number that matters is not simply how much a lender might approve.

It is how the proposed loan fits within your overall financial position.

Frequently Asked Questions About Borrowing Capacity