Before a lender will approve your home loan, they need to determine how much they're prepared to lend you. This figure — your borrowing capacity, sometimes called serviceability — is one of the most important numbers in your property journey. Understanding what drives it gives you the power to improve it before you apply.
What Is Borrowing Capacity?
Your borrowing capacity is the maximum loan amount a lender will approve based on your ability to meet the repayments. It's not simply based on your income — lenders look at the full picture of your financial situation, including what you owe, what you spend, and whether you could still afford the loan if interest rates were to rise significantly.
Two borrowers with identical incomes can have vastly different borrowing capacities depending on their existing debts, living expenses, and the lender they approach. This is why shopping around — or using a broker who can match you to the right lender — matters enormously.
How Lenders Calculate Borrowing Capacity
Australian lenders use a serviceability assessment to determine your borrowing capacity. The core formula is straightforward: they add up your income, deduct your declared living expenses and existing debt obligations, and calculate what repayment you can comfortably service. They then work backwards to a loan amount.
The income side typically includes:
- Base salary or wages (PAYG or self-employed net profit)
- Rental income, usually at 70–80% to account for vacancies and costs
- Bonus or overtime income, often averaged or discounted if not consistent
- Government payments such as family tax benefits
- Dividends and investment income, subject to evidence
On the expense side, lenders deduct your committed expenditures — existing loan repayments, minimum credit card payments (calculated on the full limit, not the current balance), and living costs.
The Household Expenditure Measure (HEM)
Most major Australian lenders benchmark your living expenses against the Household Expenditure Measure, or HEM. This is a conservative estimate of minimum household spending based on your household structure, location, and income — it's derived from survey data published by the Melbourne Institute.
If your declared living expenses are lower than the HEM for your household type, the lender will typically use the HEM figure regardless. This prevents borrowers from understating expenses to inflate their borrowing power. If your actual expenses are higher than HEM — which is common for households in Melbourne with private school fees, multiple vehicles, or high lifestyle spending — lenders are increasingly scrutinising bank statements to verify this.
Since the Banking Royal Commission, lenders have tightened their expense verification practices significantly. Declaring artificially low expenses is not a strategy that works, and it can result in your application being declined at a late stage.
The Effect of Existing Debts and Credit Cards
Every debt obligation you carry reduces your borrowing capacity, sometimes dramatically. Lenders assess existing commitments including:
- Personal loans and car finance — the full monthly repayment is included
- Credit cards — typically assessed at 3–3.5% of the total credit limit per month, regardless of your actual balance or whether you pay it off monthly
- BNPL (Buy Now Pay Later) facilities, which many lenders now treat similarly to credit cards
- Existing home loans and investment loans
- Guarantees you've given on another person's loan
The credit card rule is where many borrowers are surprised. A credit card with a $20,000 limit costs you roughly $600 per month in assessed obligations — even if you never carry a balance. Across three cards, that's $1,800 in monthly commitments that lenders factor into your assessment, potentially reducing your borrowing capacity by $100,000 or more.
How HECS-HELP Debt Affects Your Capacity
Your HECS-HELP (Higher Education Loan Program) debt does not appear as a liability on your credit file the way a personal loan does. However, it still impacts your borrowing capacity because lenders deduct your compulsory HECS repayment from your assessable income. This repayment threshold kicks in once your income exceeds a certain level (currently around $54,000), and the repayment rate increases as income rises.
At an income of $100,000, your compulsory HECS repayment is approximately 4.5% of your income — roughly $4,500 per year, or $375 per month. This reduces your net assessable income and therefore the loan amount you qualify for. For borrowers with significant HECS balances, this can meaningfully reduce capacity, but the only way to eliminate it is to repay the debt before applying (which may or may not make financial sense depending on the balance).
Tips to Improve Your Borrowing Power
If your initial borrowing capacity assessment falls short of what you need, there are practical steps to improve it before you apply.
Pay Down or Close Unused Credit Cards
Cancelling credit cards you don't use — or reducing limits on cards you keep — can meaningfully increase your borrowing capacity. If you have three cards with $10,000 limits each, reducing to one card with a $5,000 limit could increase your borrowing power by $60,000–$80,000 with many lenders.
Reduce Personal Debts Before Applying
If you have a car loan or personal loan with a relatively small remaining balance, consider whether it's worth clearing it prior to your home loan application. The reduction in monthly committed expenditure can outweigh the cost of using savings to clear the debt.
Document Your Income Thoroughly
Lenders need to see evidence of income. Self-employed borrowers, those with overtime or bonus income, or those receiving rental income should ensure their tax returns are up to date and their income is clearly documented. Unexplained income, cash income without evidence, or out-of-date assessments can all reduce what a lender will accept.
Consider Your Timing
Applying for a home loan just after starting a new job, just after taking on a new debt, or after a period of irregular spending can hurt your assessment. Ideally, you want at least 3–6 months of stable income and clean banking history before applying.
Different lenders assess borrowing capacity differently. Some lenders are significantly more generous than others for particular income types, household structures, or debt profiles. A broker can match you to the lender whose model suits your situation best — this alone can result in a meaningfully higher approval amount with no change to your financial position.
Understanding your borrowing capacity before you start looking at properties gives you a realistic budget and prevents the disappointment of falling in love with a home you can't finance. A free borrowing capacity assessment is one of the first things our team at FinancingAU will run through with you — it takes about 20 minutes and gives you a clear picture of where you stand across multiple lenders.