What Is Borrowing Power and How Is It Calculated?
Before you start house hunting, one number matters more than almost any other. Here's how lenders figure out how much they'll actually lend you — and how you can put your best foot forward.
Whether you're buying your first home, upgrading, or adding to an investment portfolio, your borrowing power is the starting line. It tells you — and your lender — the maximum loan amount a bank is willing to offer based on your personal financial picture. Get it right, and you walk into every property negotiation with confidence.
Borrowing power (also called borrowing capacity or serviceability) is the maximum amount a lender calculates you can comfortably repay over the life of a loan, based on your income, expenses, debts, and the lender's own credit policies.
Why Does Borrowing Power Matter?
Your borrowing power is effectively your budget. It determines which properties are in reach, whether you need a co-borrower, and how much deposit you'll need. It also affects your interest rate — some lenders reserve their sharpest rates for borrowers with strong serviceability profiles.
Understanding your borrowing power before you start searching means no wasted time, no disappointed offers, and no last-minute surprises at the finance clause stage.
The Core Formula Lenders Use
While every lender has their own credit model, they all follow the same fundamental logic: how much of your net surplus income can safely service a mortgage repayment?
That surplus is divided by the monthly repayment on a loan at the assessment rate — not your actual interest rate — to determine the maximum loan size. Most lenders currently assess loans at your actual rate plus a 3% serviceability buffer, as required by APRA.
So if the going rate on your loan is 6.2%, the lender will assess whether you can afford repayments at 9.2%. This built-in safety margin protects you if rates rise.
What Factors Affect Your Borrowing Power?
Borrowing capacity isn't a fixed number — it's built from many inputs, each of which you can influence. Here are the major variables:
Gross Income
PAYG salary, rental income, dividends, bonuses, and government payments all count — but each is treated differently by lenders.
Living Expenses
Lenders use your declared expenses or the HEM (Household Expenditure Measure) — whichever is higher. Lifestyle spending matters.
Existing Debts
Credit cards, personal loans, car finance, HECS/HELP debt, and other mortgages all reduce your available monthly surplus.
Number of Dependants
Each dependent increases your assumed living expense allowance, reducing how much is left for mortgage repayments.
Interest Rate Buffer
APRA's 3% serviceability buffer above your actual rate means your capacity is always assessed conservatively.
Loan Type & Term
IO loans temporarily reduce your minimum repayment. Longer terms reduce monthly payments, which can lift capacity slightly.
How Is Income Assessed?
Not all income is treated equally. Understanding how your income type is shaded can explain why two borrowers on similar salaries end up with very different capacity figures.
PAYG Employees
Base salary is typically accepted at 100%. Overtime, allowances, and commissions may be shaded to 80% depending on the lender and how consistent that income has been across your last two payslips and tax returns.
Self-Employed Borrowers
Most lenders look at the lower of your last two years' taxable income or the average of the two. If your income has grown significantly, some lenders will use the most recent year — this is a key area where having the right lending strategist makes a real difference in your assessed capacity.
Rental Income
Rental income from investment properties is typically shaded to 70–80% to account for vacancy, maintenance, and management costs. Some lenders are more generous depending on property type and location.
Other Income
Government payments (e.g. Family Tax Benefit) are accepted by most lenders, usually only until the child turns a certain age. Dividends, trust distributions, and foreign income each have their own treatment rules that vary by lender.
Not all lenders apply the same shading rules. One lender may count 100% of your overtime income; another may ignore it entirely. Shopping the right lender for your income profile — not just the lowest rate — is exactly what we do at KeepEasy Finance.
The Role of Credit Cards and Limits
Many borrowers are surprised to discover that lenders assess credit card limits, not just the amount you currently owe. A $20,000 credit card limit you pay off each month is still treated as a $20,000 liability — because you could theoretically draw it down at any time.
Action point: Before applying for a home loan, review your credit card limits. If you have cards you rarely use, consider reducing the limits or closing them. The impact on borrowing power can be surprisingly significant.
HECS/HELP Debt and Borrowing Power
HECS/HELP debt reduces your borrowing capacity because it reduces your take-home pay via compulsory repayments above the income threshold. At higher income levels (above ~$54,000), the mandatory repayment rate increases, further reducing your monthly surplus available for mortgage repayments.
For borrowers with large HECS balances, it's worth modelling whether voluntary repayments before a loan application improve your overall position.
Actual vs. Comfortable Borrowing Capacity
There's an important distinction between what a lender will approve and what you should actually borrow:
- Maximum borrowing capacity is the highest loan a lender is willing to approve based on their model.
- Comfortable borrowing capacity is the loan amount where your repayments leave genuine breathing room for life's variables.
Borrowing to your absolute maximum can leave you financially vulnerable to rate rises, job changes, or unexpected expenses. A good lending strategist helps you find the number that works for your goals — not just the biggest number the calculator spits out.
How to Maximise Your Borrowing Power
Borrowing capacity is not fixed. Here are the most effective levers you can pull — ideally 3 to 6 months before applying.
Reduce or Close Unused Credit Cards
Every dollar of credit card limit reduces your borrowing power regardless of what you owe. Reducing limits or closing cards you don't need is one of the fastest wins available.
Pay Down Personal Loans and Car Finance
These carry relatively high assessed repayments. Eliminating them before application can meaningfully increase your monthly surplus — and your loan ceiling.
Tidy Up Your Spending 3 Months Before Applying
Lenders review your bank statements. Irregular discretionary spending — subscriptions, gambling, frequent dining — raises red flags and can increase your assessed living expenses.
Declare All Your Income
Secondary income, rental returns, government payments — ensure your lending strategist knows all income streams so they can select the lender who treats them most favourably.
Consider a Joint Application
Adding a co-borrower (spouse, partner, or family member) with income can substantially increase your combined borrowing capacity.
Choose the Right Lender for Your Profile
Different lenders apply different policies on income shading, expense benchmarks, and debt treatment. The right match for your circumstances can add tens of thousands to your capacity.
A Quick Example
Let's say a couple earns a combined gross income of $160,000 per year. After tax, their take-home is around $122,000 — about $10,170/month. Lenders assess their living expenses at approximately $3,800/month and they have a $10,000 credit card limit (assessed as a ~$300/month liability).
At an assessment rate of 9.0%, their remaining surplus of roughly $6,070/month supports a loan of approximately $720,000–$780,000, depending on the lender.
Now if they reduce their credit card limit to $5,000 and pay off a $15,000 car loan before applying, the same calculation might shift to $800,000+ — a meaningful difference in what they can buy.
The above is illustrative only. Your actual borrowing capacity depends on your full financial picture and the specific lender's credit model. Always speak with a qualified lending professional before making financial decisions.
Frequently Asked Questions
Does checking my borrowing power affect my credit score?
A quick indicative calculation — like the kind a lending strategist does in an initial consultation — does not affect your credit score. Only a formal credit application lodged with a bureau appears on your file. At KeepEasy, we always scope your position before lodging anything formal.
Can my borrowing power change between approval and settlement?
Yes. If you take on new debt, change jobs, or your financial position changes materially between pre-approval and settlement, the lender will re-assess. This is why it's important not to make any major financial changes once you're in the approval process.
Does the size of my deposit affect borrowing power?
A larger deposit doesn't directly increase the loan amount a lender will approve on serviceability — but it does reduce the loan you actually need, and it removes the cost of Lenders Mortgage Insurance (LMI) above an 80% LVR.
Is borrowing power the same across all lenders?
No — and this is critical. Borrowing capacity can vary by $50,000 to $200,000+ between lenders for the same borrower. Different living expense benchmarks, income shading policies, and credit card treatment lead to very different outcomes. This is one of the most important reasons to use a lending strategist rather than going directly to a single bank.
Ready to Know Your Real Borrowing Power?
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