How Much Can You Borrow? How Australian Lenders Assess Borrowing Capacity

Finding that your dream house for sale is nothing short of exciting, but the next step is, unfortunately, finding out how much you can borrow to buy it. Banks and lenders use many variables to work out your borrowing capacity – income, debts, spending behaviour, credit history – even the number of credit cards in your wallet – to determine how much they are willing to lend.

Understanding how borrowing capacity works can mean the difference between securing your dream home and falling short at auction.

What “Borrowing Capacity” Actually Means

Borrowing capacity (sometimes called ‘serviceability’) is the amount a lender believes you can comfortably repay over time. It is not simply based on income – instead, leaders look at three things:

The Key Factors Lenders Use

1. Your Income, which typically includes:

• Salary or wages (Lenders prefer borrowers who are full-time employees with at least 6–12 months in the same role)
• Bonuses (sometimes discounted)
• Overtime
• Rental income
• Casual income (this will be assessed but not in full as lenders will assume that it’s not consistent)
• Self-employment income
• Government payments (in some cases)
• Self employed income (self-employed borrowers usually need two years of tax returns and face stricter scrutiny).

However, lenders may not count all income that you earn. For instance, rental income and bonuses are not guaranteed so they are not assessed at 100%.

For example:

Salary	100%
Rental income	70 – 80%
Bonuses	50 – 80%

Rental income is discounted because lenders assume periods of vacancy or maintenance costs.

2. Your Expenses, which means you are normally asked to provide 3 – 6 months of bank statements.

• Groceries
• Eating out
• Subscriptions
• Travel
• School fees
• Childcare
• Insurance
• Utilities

Unfortunately even if you are someone who somehow manages to keep costs really low (you’re on a yearly ‘no spend challenge’ for example), lenders may apply a benchmark known as the Household Expenditure Measure (HEM). The Melbourne Institute developed this benchmark, which estimates typical living costs based on household size and income. If your actual spending is much lower than HEM, the bank may end up using the higher benchmark figure instead.

3. Existing Debts, which include the following

• Personal loans
• Car loans
• Buy Now Pay Later accounts (Afterpay, Zip Pay, PayPal Pay in 4)
• Student loans
• Credit cards

It’s worth noting here that credit cards have a particularly large impact. Even if you owe nothing on your credit card, lenders assume you could max out the limit.

Example:

Credit Card Limit	Monthly Repayment Assumed
$30,000	Many lenders treat this as $900 – $1,200 monthly debt servicing.

The Hidden Rule: Interest Rate Buffers

Lenders do not assess your ability to repay at the current rate. Instead, they apply a buffer rate – which is normally about 3% above the loan rate.

For example:

Actual Rate	Assessment Rate
6%	9%

This ensures borrowers can still repay if interest rates rise.

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Debt-to-Income Ratios

Another equation lenders like to use is the Debt-to-Income ratio (DTI), which measures total debt compared with gross income.

Typical ranges:

Debt-to-Income ratio (DTI)	Meaning
Below 4	Very strong
4 – 6	Acceptable
6+	Higher risk

Here is a quick example:

Income: $150,000
Loan: $750,000

DTI = 5

High DTIs can lead to:

• lower borrowing capacity
• higher scrutiny
• possible rejection

Your Credit Score Matters More Than You Realise

You may not even be aware of this, but you have a credit score, which is kind of like a school report detailing how careful you are with money. Before lending you money, lenders will check your credit history through reporting agencies such as Equifax and Experian. Lenders look for such things as:

• missed repayments
• defaults
• payday loans
• excessive credit applications

Can You Access Your Credit Score Before Applying For a Loan?

Absolutely. In Australia, you have the right to access your credit report and credit score. You can request a free credit report at least once a year. Several credit reporting agencies provide free access to your credit file, including Equifax, Experian, and illion.

These reports show:

• your credit score
• past loan applications
• credit cards and limits
• repayment history
• any defaults or missed payments

Checking this information before applying for a home loan may actually help identify issues that might affect approval. And no, checking your own credit score does not hurt your application. When you check your own credit score, it is recorded as a “soft enquiry”, which does not affect your credit rating. By contrast, when a lender assesses your application it creates a “hard enquiry.”

Multiple “hard enquiries” within a short period can lower your credit score.

Errors can something occur in credit reports – such as loans listed that have already been repaid, or outdated credit limits. Correcting these issues before applying for a mortgage may improve your financial profile – so reviewing your credit profile three to six months before applying for a loan may help avoid any unwanted surprises during the loan approval process.

What Is Considered a Good Credit Score?

Credit score ranges vary slightly between agencies.

A typical range for Equifax looks like this:

Score	Rating
0 – 459	Below average
460 – 660	Average
661 – 734	Good
735 – 852	Very good
853 – 1,200	Excellent

Higher scores generally indicate lower credit risk.

Dependants and Family Size

Big families with lots of children will have lower borrowing capacity because of the costs associated with children, including:

• childcare
• schooling
• living expenses (clothes, sport and so forth)

Even if grandparents help financially, lenders still include the cost.

Loan-to-Value Ratio (Deposit Size)

The size of the deposit that you put down will also influence how much you can borrow. Higher deposits reduce risk and can lead to better interest rates.

If your deposit is under 20%, lenders often require Lenders Mortgage Insurance (LMI). This insurance protects the lender – not the borrower – if the loan goes into default. The cost of LMI can range from roughly $10,000 to $30,000 or more depending on the loan size and deposit.

Deposit	Loan-to-Value Ratio (LVR)	Implication
20%	80%	avoids lenders mortgage insurance
10%	90%	may require insurance
5%	95%	much stricter approval

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How To Prepare Before Applying for a Home Loan

Many borrowers underestimate how much preparation can influence borrowing capacity. In the months before applying for a loan, lenders typically examine bank statements, existing debts, and credit history to assess how manageable the loan will be.

Steps that can strengthen your position include:

• Reduce or cancel unused credit cards – lenders often assess the full credit limit as potential debt, even if the balance is zero.
• Pay off personal loans or car finance – lowering existing repayments can increase borrowing capacity.
• Stabilise your spending – lenders often review 3–6 months of bank statements, so reducing discretionary spending during this period can help demonstrate financial discipline.
• Avoid new credit applications – applying for store finance, BNPL services or additional credit cards can create credit enquiries that may weaken your application.
• Improve your credit profile – pay bills on time, close unused accounts and avoid high-risk borrowing such as payday loans.
• Increase your deposit where possible – a larger deposit improves approval chances and may lead to more competitive interest rates.
• Compare lenders or speak with a mortgage broker – different lenders assess income and serviceability differently, which can affect borrowing capacity.