Lenders calculate how much you can borrow by assessing your income against your living expenses, existing debts, and a buffer rate that sits above current interest rates.
Most people approach borrowing capacity assuming it's a simple formula based on salary, but lenders use serviceability calculators that factor in household size, credit card limits, childcare costs, and even potential rate rises. Two applicants earning the same income can receive different loan amounts depending on how their financial obligations compare.
How Lenders Assess Your Income
Lenders verify your gross income through payslips, tax returns, and employment contracts. They accept base salary, regular overtime, rental income, and certain allowances, but each lender treats these sources differently. Some will include 80% of overtime if it's been consistent for two years, while others won't count it at all. Rental income is typically assessed at 75-80% of the actual amount to account for vacancies and maintenance.
Consider a buyer earning $95,000 in base salary with an additional $12,000 in overtime each year. One lender might assess their income at $104,600 (base plus 80% of overtime), while another uses only the base amount. That difference can shift borrowing capacity by $60,000 to $80,000 depending on other financial commitments.
What Lenders Count as Commitments
Your existing debts reduce how much you can borrow, but lenders don't just look at what you currently owe. They assess credit card limits at their full amount even if you pay the balance in monthly. A credit card with a $15,000 limit costs you roughly $450 per month in serviceability, regardless of whether you owe $500 or nothing. Personal loans, car loans, HECS debt, and Buy Now Pay Later accounts all reduce your capacity.
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Lenders also estimate your living expenses using the Household Expenditure Measure (HEM), which sets minimum spending levels based on household size and location. If your declared expenses fall below HEM, the lender uses the higher figure. A single applicant might declare $1,800 in monthly expenses, but if HEM suggests $2,200 for someone in their situation, the lender applies the benchmark.
The Buffer Rate and Serviceability Test
Lenders don't assess your loan at the current interest rate. They add a buffer of around 3%, meaning if the variable rate sits at 6.2%, they test whether you can service the loan at roughly 9.2%. This protects both you and the lender if rates rise during the loan term.
In a scenario where an applicant applies for a $600,000 loan, the lender calculates repayments at the buffered rate, not the actual rate. If those repayments, combined with living expenses and other commitments, exceed a certain percentage of gross income (usually around 30-40% depending on the lender), the loan amount gets reduced or declined. This is why two applicants with similar incomes might receive vastly different pre-approvals.
How Deposit Size Affects Borrowing
Your deposit doesn't directly increase how much you can borrow, but it does affect whether you need to pay Lenders Mortgage Insurance (LMI). If your deposit is below 20% of the property value, LMI applies, and this cost gets added to your loan amount or paid upfront. A larger deposit reduces the loan to value ratio, which can open access to lenders with more favourable serviceability policies.
Some lenders also adjust their interest rate based on your LVR. Borrowing at 95% LVR often attracts a higher rate than borrowing at 80%, which affects your repayments and therefore your serviceability. If you're close to a serviceability limit, a slightly larger deposit can bring the rate down enough to increase what you're approved for.
Pre-Approval and Conditional Approval
Pre-approval gives you an indication of your borrowing capacity before you start looking at properties, but it's not a guarantee. Lenders issue home loan pre-approval based on the information you provide, and they'll reassess once you nominate a property and submit full documentation. Conditional approval follows a property contract and involves a valuation, which can affect the final loan amount if the property doesn't appraise at the purchase price.
Pre-approval typically lasts three to six months, depending on the lender. If your financial situation changes during that period, such as a new credit account or reduced income, the lender may adjust or withdraw the approval.
Comparing Lender Policies
Not all lenders assess borrowing capacity the same way. The major banks tend to apply conservative serviceability models, while some non-bank lenders and smaller institutions use more flexible approaches. This doesn't mean one is riskier than the other - it reflects different risk appetites and funding structures.
A buyer knocked back by one lender due to a high HECS balance or irregular income might find another lender willing to assess their situation more favourably. Working with a broker gives you access to multiple lender policies without submitting separate applications, which can affect your credit file if done repeatedly.
Call one of our team or book an appointment at a time that works for you to review your income, commitments, and deposit position. We'll run your scenario through multiple lender calculators and show you exactly where you stand before you start looking at properties.
Frequently Asked Questions
How do lenders calculate how much I can borrow for a home loan?
Lenders assess your gross income against living expenses, existing debts, and a buffer rate typically 3% above the current interest rate. They use serviceability calculators that factor in household size, credit limits, and the Household Expenditure Measure to determine how much you can afford to repay.
Does a larger deposit increase how much I can borrow?
A larger deposit doesn't directly increase borrowing capacity, but it reduces your loan to value ratio and can eliminate Lenders Mortgage Insurance. This may provide access to lenders with more favourable serviceability policies or lower interest rates, which can indirectly affect your approval amount.
Why does my credit card limit affect my borrowing capacity?
Lenders assess credit card limits at their full amount, not your current balance, because you could potentially draw the entire limit at any time. A $15,000 credit card limit reduces your borrowing capacity by roughly $60,000 to $80,000 depending on other commitments.
What is the buffer rate used in home loan assessments?
The buffer rate is an additional percentage lenders add to the current interest rate when testing your ability to service a loan, usually around 3%. This ensures you can still afford repayments if interest rates rise during your loan term.
Can I get approved for different amounts with different lenders?
Yes, lenders use different serviceability models and treat income sources and debts differently. One lender might count overtime or rental income more generously, while another applies stricter living expense benchmarks, resulting in varied borrowing capacity across institutions.
