How to Calculate Your Borrowing Power in Australia

Before you start browsing property listings or attending open homes, understanding your borrowing power is an essential first step in the home buying journey. Your borrowing power, also known as borrowing capacity, determines the maximum amount a lender is willing to loan you based on your financial circumstances. This figure sets the realistic price range for your property search and helps you plan your budget effectively. In this guide, we explore how Australian lenders calculate borrowing power and what you can do to maximise yours.

What Is Borrowing Power and Why Does It Matter?

Borrowing power refers to the maximum loan amount a lender will approve based on their assessment of your ability to repay the debt. It is not simply a matter of income but involves a comprehensive analysis of your financial situation including income, expenses, existing debts, and the buffer lenders apply to protect against interest rate rises. Understanding your borrowing power helps you search for properties within a realistic budget, negotiate with confidence when you find the right property, and avoid the disappointment of falling in love with a home you cannot afford.

How Do Lenders Calculate Borrowing Power?

Income Assessment

Lenders start by evaluating your income to determine how much money you have coming in to service a loan. For employees, this includes base salary, regular overtime, bonuses, and commissions, though lenders may only count a percentage of variable income components. Rental income from investment properties is typically included at 80 percent of the amount to account for vacancy and expenses. For self-employed borrowers, lenders usually look at the average of the last two years of tax returns and may apply additional scrutiny to ensure income is stable and sustainable.

Living Expenses Assessment

Australian lenders use the Household Expenditure Measure (HEM) as a benchmark for living expenses, though many now require borrowers to declare actual expenses which are compared against HEM. If your declared expenses are higher than HEM, lenders will use the higher figure. This is a significant change from historical practices where HEM was often automatically applied, and means that borrowers with high spending habits may find their borrowing power reduced. Categories assessed include food and groceries, utilities and bills, transport costs, insurance premiums, clothing, entertainment, and childcare.

Existing Commitments

All existing debts and financial commitments reduce your borrowing power. These include current home loans, personal loans, car loans, HECS-HELP debts, credit card limits (not just balances, but the full credit limit available), and buy-now-pay-later accounts. Even if you do not use your credit card, lenders assume you could max it out and calculate repayments on the full limit. This is why closing unused credit cards before applying for a home loan can significantly boost your borrowing power.

Serviceability Buffer

Following APRA guidelines, Australian lenders must assess your ability to repay the loan at an interest rate buffer above the actual loan rate. Currently, this buffer is typically 3 percent, meaning if you apply for a loan at 6 percent, the lender will assess whether you can afford repayments at 9 percent. This protects borrowers from financial stress if interest rates rise but significantly reduces maximum borrowing amounts compared to calculations using actual rates.

Factors That Reduce Your Borrowing Power

High Living Expenses

Lifestyle spending directly impacts borrowing capacity. If your declared expenses on dining out, subscriptions, travel, and discretionary purchases are high, lenders will factor this into their calculations. Consider reviewing and potentially reducing non-essential spending in the months leading up to your loan application, as lenders typically review the most recent three months of bank statements.

Multiple Credit Facilities

Each credit card, buy-now-pay-later account, or unused loan facility reduces your borrowing power even if you are not using them. Lenders see these as potential debts that could be incurred at any time. Consolidating and closing unnecessary credit facilities before applying for a home loan is one of the quickest ways to improve borrowing capacity.

Variable or Unstable Income

While a high income generally increases borrowing power, lenders are cautious about income that fluctuates or comes from sources perceived as less stable. Casual employees, contractors, self-employed borrowers, and those with income heavily weighted toward bonuses or commissions may find lenders apply conservative assumptions to their income calculations.

Strategies to Maximise Your Borrowing Power

Pay Down Existing Debts

Reducing or eliminating existing debts before applying for a home loan directly increases your borrowing capacity. Focus particularly on credit cards and personal loans, which have high minimum repayment assumptions in lender calculations. Even if you cannot pay off debts completely, reducing balances and credit limits helps.

Reduce Credit Card Limits

As mentioned, lenders assess credit cards based on limits rather than balances. If you have a $20,000 credit limit but only use $2,000, consider reducing the limit to $5,000 or closing the card entirely. This simple step can add tens of thousands of dollars to your borrowing power.

Demonstrate Savings Habits

Lenders look favourably on borrowers who demonstrate consistent savings patterns. Having a track record of regular savings, even if the amounts are modest, shows financial discipline and increases lender confidence in your ability to manage mortgage repayments. This can sometimes result in more favourable treatment at the margins of lending criteria.

Apply with the Right Lender

Different lenders have different serviceability calculators and policies. While one lender might approve you for $600,000, another might approve $650,000 based on how they assess the same financial information. Working with a mortgage broker who understands multiple lenders' policies can help identify the lender most likely to maximise your borrowing power while still offering competitive rates and suitable loan features.

The Difference Between Borrowing Power and What You Should Borrow

It is crucial to understand that maximum borrowing power is not necessarily what you should borrow. Lenders calculate what they are willing to lend, not what is comfortable for you to repay given your lifestyle and goals. Many financial experts suggest keeping mortgage repayments below 30 percent of your gross income to maintain a comfortable lifestyle and buffer against unexpected expenses or income changes. Before committing to your maximum borrowing amount, honestly assess whether the resulting repayments fit comfortably within your budget while still allowing for savings, lifestyle, and unexpected costs.

Conclusion

Understanding how borrowing power is calculated empowers you to take control of your home buying journey. By knowing what factors lenders consider and taking strategic steps to optimise your financial position before applying, you can maximise your borrowing capacity and expand your property options. Remember that while increasing your borrowing power is valuable, borrowing responsibly within your means is equally important for long-term financial wellbeing. Take time to calculate not just what you can borrow, but what repayments you are genuinely comfortable with given your complete financial picture and future goals.