When to Check Your Borrowing Capacity

Your borrowing capacity determines how much a lender will approve, not just how much you want to spend.

Lenders assess your income, expenses, existing debts, and dependents to calculate a figure they're comfortable lending. That figure might be higher or lower than you expect, and knowing it before you start looking at properties saves time and helps you focus on homes within reach.

How Lenders Calculate What You Can Borrow

Lenders use your gross income as a starting point, then subtract your monthly expenses, debt repayments, and a buffer to account for future rate rises. The buffer typically assumes rates could increase by 2% to 3% above the current variable rate, so your capacity is tested against a higher repayment than what you'd pay today. Different lenders apply different buffers and expense benchmarks, which is why your capacity can vary depending on where you apply.

Consider a buyer earning $95,000 a year with a car loan repayment of $450 per month and average living expenses. One lender might calculate capacity at around $520,000, while another using a lower expense benchmark might approve closer to $560,000. The difference comes down to each lender's serviceability policy, not your financial position.

When Your Income Includes Bonuses or Overtime

Some lenders accept 100% of your base salary but only 80% of bonuses, while others will consider the full amount if it's consistent over two years. If a significant portion of your income comes from commission, overtime, or rental income, the way each lender treats that income directly affects how much you can borrow. Knowing which lenders are more flexible with income types lets you approach the right one from the start.

Rental income from an investment property is typically assessed at 80% of the actual rent, and if you have an existing mortgage on that property, the repayment is deducted from your capacity. If you're relying on rental income to boost what you can borrow, the lender will want to see a lease agreement and evidence of consistent payments.

The Impact of Existing Debts on Your Capacity

Credit card limits reduce your borrowing capacity, even if you pay the balance in full each month. Lenders assume you could draw the full limit at any time, so a $10,000 credit card limit might reduce your capacity by $30,000 to $40,000, depending on the lender's calculation. If you're not using a card, closing it or reducing the limit before you apply can increase how much you're approved for.

Buy now, pay later accounts are treated the same way. Even small limits across multiple platforms add up, and lenders will either factor in a minimum monthly repayment or reduce your capacity based on the total exposure. Closing accounts you don't use is a straightforward way to improve your position without changing your income.

How Dependents and Living Expenses Affect Approval

Lenders apply a benchmark for living expenses based on your household size, and that benchmark is often higher than your actual spending. If you have dependents, the assumed cost of raising them is built into the calculation, which reduces how much you can borrow compared to a single applicant with the same income. Some lenders allow you to provide evidence of lower expenses, but most will apply their own figure regardless of what you declare.

Childcare costs are treated as an ongoing expense and deducted from your capacity. If those costs will reduce or stop in the near future, some lenders will take that into account, but you'll need to demonstrate the timeframe and provide supporting documents.

Variable Rate vs Fixed Rate and Your Capacity

If you're applying for a variable rate loan, the lender tests your capacity using the current variable rate plus a buffer. If you're applying for a fixed interest rate, the same buffer applies, even though your repayment will be locked for the fixed period. The assessment doesn't change based on the product you choose, it's designed to make sure you can still afford the loan if rates rise after the fixed term ends.

A split loan, where part of the balance is fixed and part is variable, is assessed the same way. The lender doesn't give you additional capacity because you've locked in a portion of the rate, they test the full amount against a stressed rate to ensure serviceability over the life of the loan.

When to Reassess Your Capacity

Your borrowing capacity changes whenever your income, debts, or household circumstances change. A pay rise, a closed credit card, or paying off a car loan can all increase what you're approved for. If you checked your capacity six months ago and your financial position has improved, it's worth reassessing before you assume you're still limited to the same amount.

If you've received home loan pre-approval and your circumstances change before settlement, such as taking on a new personal loan or changing jobs, your approval could be affected. Lenders typically reconfirm your position closer to settlement, so it's important to avoid taking on new debt or making large purchases until the loan is finalised.

How Loan to Value Ratio Affects What You Can Borrow

Your deposit size determines your loan to value ratio, and that ratio affects whether you'll need to pay Lenders Mortgage Insurance. If you're borrowing more than 80% of the property value, LMI is typically required, and the premium is either paid upfront or added to the loan amount. Adding it to the loan increases your total borrowing, which can push you closer to your capacity limit or over it, depending on how much room you have.

If you're at the upper end of your capacity, a higher LVR might mean you need to reduce your purchase price or increase your deposit to stay within what the lender will approve. Running the numbers before you make an offer helps you understand whether the deposit you have is enough to support the price you're targeting.

Why Different Lenders Give Different Answers

Each lender has their own serviceability model, and the difference between them can be significant. Some lenders are more conservative with expense assumptions, others are more flexible with how they treat certain income types, and a few will allow you to use actual living costs if they're below the benchmark. If one lender tells you that you can borrow $480,000 and another says $520,000, both answers can be correct based on their individual policies.

Working with a mortgage broker gives you access to multiple lenders without needing to apply to each one separately. A broker can run your details through different serviceability calculators and identify which lenders are likely to give you the highest approval based on your specific situation. That insight is particularly useful if your income structure is varied or if you have existing debts that some lenders treat more favourably than others.

If you're ready to understand your borrowing capacity or you want to explore how different lenders assess your situation, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions