Understanding Your Borrowing Capacity: What Lenders Actually Look At

It’s Not Just About Your Income

Most people assume borrowing capacity is simply a multiple of your income. In reality, lenders look at a much more complex picture — and understanding it can help you maximise what you’re able to borrow.

The Key Factors Lenders Assess

1. Income

Lenders look at your gross income (before tax), including salary, rental income, investment income, and in some cases, government payments. If you’re self-employed, lenders typically want to see 2 years of tax returns to assess your income stability.

2. Existing Debts and Commitments

Every debt you have — credit cards, personal loans, HECS/HELP debt, car loans, buy-now-pay-later — reduces your borrowing capacity. Even a credit card you never use counts against you, because lenders assume you could max it out at any time. Paying down or closing unused credit facilities before applying can make a real difference.

3. Living Expenses

Since the Banking Royal Commission, lenders scrutinise living expenses much more carefully. They’ll look at your bank statements and compare your actual spending against the Household Expenditure Measure (HEM) benchmark. If your spending is higher than average, it reduces how much you can borrow.

4. Number of Dependants

Each child or dependant reduces your assessed borrowing capacity, as lenders factor in the cost of supporting them.

5. The Interest Rate Buffer

Lenders don’t assess your ability to repay at the current rate — they add a 3% buffer on top. So if the loan rate is 6%, they assess you at 9%. This is to ensure you can still afford repayments if rates rise.

How to Maximise Your Borrowing Capacity

• Pay down or close credit cards and personal loans before applying
• Reduce your buy-now-pay-later limits
• Avoid applying for new credit in the 6 months before your home loan application
• If self-employed, ensure your tax returns are up to date and show consistent income
• Save a larger deposit — it reduces the loan amount needed and demonstrates financial discipline

Get a Clear Picture Before You Start Looking

Claire can give you a realistic assessment of your borrowing capacity before you start house hunting — so you’re not wasting time looking at properties you can’t afford, or selling yourself short by not knowing what you actually qualify for. Fill out the home loan enquiry form to get started.