How Borrowing Power is Calculated in Australia
Published by SWIFT ACCOUNTANTS PTY LTD · Last reviewed
Before you can buy a home, you need to understand how much a lender will actually lend you. Borrowing power is not simply based on your salary — lenders assess your income, living expenses, existing debts, and your ability to repay at higher interest rates. This guide explains exactly how that calculation works and what you can do to improve your position.
The Core Components of Borrowing Power
Australian lenders use a debt-to-income serviceability model to assess borrowing capacity. Rather than a simple multiple of income, they work out your monthly surplus — income minus living costs minus existing debts — and determine what mortgage repayment you can comfortably make at a higher-than-actual interest rate.
The key inputs in a lender's assessment are:
Gross Income
All sources: salary, self-employment, rental, government payments
Living Expenses
Declared expenses vs Household Expenditure Measure (HEM)
Existing Debts
Credit cards, car loans, personal loans, HECS/HELP
Dependants
Number of children and dependants increases assessed expenses
Deposit
Larger deposit reduces LVR and may improve loan-to-value assessment
Assessment Rate
Your actual rate + the 3% APRA serviceability buffer
The 3% Serviceability Buffer Explained
Since October 2021, APRA (the Australian Prudential Regulation Authority) has required all authorised deposit-taking institutions to assess home loan applications at the higher of:
- The loan's interest rate plus 3%, or
- A floor rate of 5.5% (whichever is higher)
In practice, with current rates around 6%–7%, the 3% buffer is the operative test — meaning lenders check whether you can afford repayments at 9%–10% even if your actual rate is 6%. This significantly reduces the maximum loan size compared to what a simple income-multiple approach would suggest.
The buffer exists to protect borrowers. If rates rise after you take out the loan (as they did sharply in 2022–2023), the buffer ensures most borrowers were assessed at rates high enough to still comfortably service their loan.
Approximate Borrowing Power by Income
The table below shows rough estimates only, assuming no existing debts, standard living expenses, and a current assessment rate of approximately 9.5%. Actual borrowing power varies significantly by lender and individual circumstances.
| Annual Income | Estimated Borrowing |
|---|---|
| $60,000 | ~$320,000 |
| $80,000 | ~$450,000 |
| $100,000 | ~$570,000 |
| $120,000 | ~$690,000 |
| $150,000 | ~$870,000 |
| $200,000 | ~$1,160,000 |
Single applicant, no existing debts, standard living expenses. Use our borrowing power calculator for a personalised estimate.
Living Expenses: HEM and Declared Expenses
Lenders use the higher of your declared living expenses and the Household Expenditure Measure (HEM). The HEM is a benchmark living expense figure based on location, income, and family structure, developed by the Melbourne Institute.
If you declare expenses below the HEM, the lender uses the HEM figure instead. If your actual declared expenses are higher than HEM (which is common in expensive cities like Sydney and Melbourne), the lender uses your declared figure. This means that significantly under-declaring living expenses is unlikely to improve your borrowing power — lenders are increasingly scrutinising declared expenses post-2018 royal commission scrutiny.
How to Improve Your Borrowing Power
Several factors can meaningfully improve how much a lender will offer:
Reduce Existing Debts and Credit Limits
Every dollar of outstanding debt reduces your borrowing power. More significantly, lenders assess credit card limits at 3.8% of the limit per month — even if you never use the card. A $20,000 credit card limit reduces your assessed disposable income by $760 per month. Closing unused credit cards before applying for a home loan can noticeably improve your borrowing capacity.
Save a Larger Deposit
A larger deposit reduces the loan amount needed and demonstrates financial discipline. At less than 20% deposit, you typically need Lenders Mortgage Insurance (LMI), which adds to the loan cost. At 20% deposit (LVR of 80%), you avoid LMI and may access better rates.
Apply Jointly
Combining incomes with a partner can nearly double your borrowing power, subject to both parties' debts and expenses. Joint applications are assessed on combined income minus combined liabilities.
Estimate Your Borrowing Power Now
Use our free borrowing power calculator to get an estimate based on your income, expenses, and existing debts — no sign-up required.
Try the Borrowing Power Calculator →