How do banks work out how much I can borrow?

When it comes to how much you can borrow and what the lender is prepared to approve, there can be some gaps in understanding how the process works which can be frustrating or even costly.

A common example of this is when buyers have a large deposit ready only for the lender to deny the loan.

This is because the borrower needs to satisfy 2 main conditions for the lender to approve your loan.

  1. Equity or Savings – How much savings you have to put toward your purchase.
  2. Servicing – Lenders differ in policies and how much risk they are willing to take with each loan. This means that they view your financial position differently between each other.

Below we will talk about how lenders can differ from each other and how you can prepare yourself even before applying for a loan.

What does borrowing capacity mean?

Borrowing Capacity by definition is how much the lender is prepared to lend you based on your uncommitted funds (your Net Income minus your Total Expenses*).

In other words, how much extra income do you have leftover to meet the request home loan repayment after accounting for total expenses?

When calculating this surplus income, lenders will apply a ‘stress test’ on your existing financial position to simulate a ‘worst-case scenario’ where you are still able to service the loan, ensuring responsible lending.

*Total Expenses are not restricted to just your basic and discretionary living expenses.

What affects my borrowing capacity?

Several factors may affect your borrowing capacity.


  1. Income from work – some lenders may include overtime, bonuses and/or commissions
  2. Rental income from investment properties – residential and commercial
  3. Government Benefits & Child Support Payment – lenders may require your dependant to be not older than 11 or 13 years old
  4. Dividends from a share portfolio


  1. Existing home loans or investment loan debts
  2. Personal debts – credit card, leases, personal loan and car loan
  3. HECS/HELP debt
  4. Buy Now and Pay Later arrangement – e.g. After-pay, Zip-Pay


  1. Number of applicants
  2. Number of dependants
  3. Rental expenses – applies if you are not buying an owner-occupied property
  4. Estimated Declared Living Expenses – including Basic and Discretionary living expenses
  5. Child Support Payment
  6. Retirement Age

Lender – Differing Policies

  1. Assessment interest rate – a higher interest rate that lenders will use to when assessing the loan to simulate if the borrower can still maintain the repayments if it increases. Typically, a 2.5% interest buffer on top of the customer’s interest rate is used. The assessment rate is typically used on existing and new loans.
  2. The purpose of the property – Investment properties may help lift your borrowing capacity due to rental income and because interest paid on an investment property is 100% tax-deductible, reducing the potential tax payable.
  3. Credit card limits – some lenders will calculate the monthly repayments of your credit cards based on the limit (maxed out) rather than the actual owing amount.
  4. The LVR you are seeking – some lenders will require you to have additional cash buffer if you are borrowing more than 90% LVR
  5. Lender’s Household Expenditure Measure (HEM) – a calculated figure which is an estimate that lenders use to predict your living expense. The lender will use the higher between their HEM figure and your actual declared living expenses.
  6. Your credit score – If you have credit adversity such as defaults or bankruptcy, it reduces your credit score which will impact your borrowing capacity and the type of product that is available to you.
  7. The property’s risk – e.g. high-density areas

Why do some lenders lend more than others?

Just like your unique circumstances, different lenders will have different risk appetite which is guided by their lending policy. Factors that vary amongst lenders are;

  1. Assessment Rate
  2. Household Expenditure Expense (HEM)
  3. How they treat your liabilities such as your credit card limit and HECS/ HELP debt
  4. Security Type: Some lenders will restrict how much you can borrow based on the property type and location (e.g. High-Density Apartments)
  5. Rental Income: Some lenders may apply a 20% shading on the gross rental income whereas some lenders may apply a 30% shading which can further reduce your ability to borrow.
  6. What income they are prepared to use and how they apply it as part of your servicing. (e.g. rental income, bonus and commission)

What can I do to increase my borrowing capacity?

There are several ways you can position yourself to be able to borrow more before you submit your loan application.

  1. Reduce your credit card limit (not outstanding balance) if you do not need it.
  2. Pay-off / Close your existing debt (personal / car loan etc.). You may need a closing letter to confirm account closure before approval.
  3. Consolidate your existing loans into your home loan. By resetting your loan to 30 years instead of a standard 5-7 year term, your monthly repayments would be lower. Please note by consolidating your loan using your home and pay the minimum repayment, you will be paying more interest in the long term.
  4. Cut down on discretionary living expenses (e.g. subscriptions, recreation, etc.)
  5. If you receive bonuses or commissions, find a lender that is prepared to consider 100% of the commission.
  6. If you are not applying with your partner and share an existing home loan, you may want to find a lender that has a common debt reducer policy. This is where the lender is prepared to consider only your portion of your existing debt when working how much you can borrow for your new loan.

How does my employment affect my ability to borrow?

A lot of borrowers are under the impression that they can borrow because they are currently employed. Here are a few situations borrowers should confirm before applying;

Employment Type (Casual or Contract Role):

  • Casual: Lenders may require the borrower to be with the same company for a minimum of 6-12 months before they can consider the borrower’s income as part of the application
  • Contract Role: This depends if your employer withholds tax and pays your super on your behalf. If yes, then it will be like a casual role where the minimum employment with the lender is 6-12 months

Maternity/Paternity Leave: Some lenders may require the borrower to be on paid-maternity/paternity leave to consider their income whereas other lenders may request an employment letter detailing the employee’s income when they return to work.

Probation: This policy requires the borrower to be off their probation period (typically 6 months) with their current employer. A lot of lenders are willing to mitigate the probation policy if you can demonstrate you have been in your industry for more than 2 years and with no employment gap of 30 days or more. It is important to note some lenders may still apply the probation policy.

** General Advice Warning

The information provided on this website is general in nature only and it does not take into account your personal needs or circumstances into consideration. Before acting on any advice, you should consider whether the information is appropriate to your needs and where appropriate, seek professional advice in relation to legal, financial, taxation, mortgage or other advice.

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