Do you know how much you can borrow for a home loan?

How Lenders Calculate Your Borrowing Capacity

Lenders assess how much you can borrow by comparing your income against your existing debts and living expenses, then applying a serviceability buffer to account for potential rate increases. Most lenders use a buffer of 3%, meaning they test whether you could still afford repayments if your interest rate rose by that amount. Your borrowing capacity is not just about how much you earn, but how much remains after your commitments are covered.

Consider a household in Sandringham with a combined annual income of $180,000. If they have a car loan with monthly repayments of $650, a personal loan at $400 per month, and two credit cards with a combined limit of $20,000, the lender doesn't just look at what they currently owe on those cards. They assess the monthly repayment as if both cards were fully drawn, which could add another $600 to monthly commitments. Once living expenses are factored in based on the Household Expenditure Measure, their borrowing capacity might sit around $750,000, even though their income alone might suggest more.

The difference between what you think you can borrow and what a lender will approve often comes down to hidden commitments. A Buy Now Pay Later account, even if you use it occasionally, can reduce your capacity by $30,000 to $50,000. The same applies to unused credit card limits. Closing accounts you don't use or reducing limits before you apply for a home loan can lift your borrowing capacity without changing your income.

Income Types That Strengthen Your Application

Base salary is the simplest form of income to verify, but lenders also accept overtime, bonuses, rental income, and self-employed earnings, provided you can document them consistently. For PAYG employees, most lenders will accept overtime or allowances if they've been received regularly over at least three months. Bonuses typically require a two-year history before they're included at full value.

Self-employed applicants in Bayside suburbs like Brighton or Black Rock often face tighter scrutiny. Lenders usually require two years of tax returns and sometimes a letter from your accountant confirming ongoing trading. If your taxable income is reduced by deductions, some lenders will add back depreciation or other non-cash expenses to calculate serviceability, which can improve your borrowing capacity. This is where working with a broker who understands lender policies makes a tangible difference.

Rental income from an investment property is generally assessed at 80% of the gross rent to account for vacancies and maintenance. If you're purchasing a property with a self-contained unit or planning to rent out part of your home, some lenders will include that projected income, but they'll want evidence such as a valuation noting the rental potential or a lease agreement if tenants are already in place.

The Role of Deposit Size and Loan to Value Ratio

Your deposit directly affects how much you can borrow because it determines your loan to value ratio. A 20% deposit avoids Lenders Mortgage Insurance and often unlocks lower interest rates and better loan features. If you're borrowing with a smaller deposit, LMI is added to the loan amount or paid upfront, and this increases your total borrowing, which can push you closer to your serviceability limit.

A buyer looking at a property in Hampton with a purchase price at the current suburb median might have a deposit of 15%. The LMI premium could be $15,000 to $25,000 depending on the lender, and that amount is usually capitalised into the loan. If their borrowing capacity sits at $800,000, adding LMI reduces the amount available for the property itself. In some cases, it's worth waiting a few more months to build your deposit rather than stretching your capacity and limiting your property options.

Some lenders treat LMI differently. A few allow you to borrow above 80% without charging LMI if you meet specific criteria, such as working in a medical or legal profession. Others offer LMI waivers for first home buyers in certain price brackets. These policies change regularly, so it's worth checking current options rather than assuming LMI is unavoidable.

How Living Expenses Affect What You Can Borrow

Lenders calculate your living expenses using either the amount you declare or the Household Expenditure Measure, whichever is higher. The HEM is a benchmark based on household size and income, and for a couple without children living in Melbourne's Bayside area, it might sit around $3,500 to $4,000 per month. If your actual spending is lower, the lender will still use the HEM figure, which can reduce your borrowing capacity.

This calculation matters more than most buyers realise. A household in Mentone with monthly expenses of $5,000 will have a lower borrowing capacity than an identical household with expenses of $3,500, even if their income and debts are the same. Reducing discretionary spending before you apply won't change the HEM, but it does help you build a larger deposit or pay down existing debts, both of which improve your application.

Some lenders apply a flat living expense figure regardless of what you declare, while others take a more detailed approach and ask for bank statements showing three months of transactions. If your statements show regular gambling, frequent cash withdrawals with no explanation, or patterns of overdrawing your account, it can affect your application even if your income covers your commitments.

Why Different Lenders Offer Different Borrowing Amounts

Each lender uses its own serviceability calculator, and the difference between the highest and lowest can be $100,000 or more on the same income and debts. Some lenders are more flexible with self-employed income, others accept rental income at a higher percentage, and a few still assess credit card limits more conservatively than their competitors.

If one lender tells you that you can borrow $650,000 and another offers $750,000, it's not because one is taking more risk. It's because their policy settings, buffers, and treatment of income types differ. This is where comparing home loan options from banks and lenders across Australia becomes relevant. A broker can run your scenario through multiple serviceability calculators and identify which lenders suit your income structure and deposit size.

Variable interest rates also play a role in the assessment. Some lenders assess your application using their current variable rate, while others add a margin or use a floor rate of 6% or higher. If you're applying for a fixed interest rate home loan, the lender still tests serviceability at the higher variable rate plus the buffer, so your borrowing capacity is the same regardless of the loan product you choose.

Improving Your Borrowing Capacity Before You Apply

If your borrowing capacity falls short of what you need, there are practical steps that can close the gap. Paying off small debts like personal loans or car loans eliminates monthly commitments and frees up serviceability. Closing unused credit cards or reducing limits also helps, even if the cards have no balance.

For buyers relying on two incomes, some lenders treat parental leave differently. If you're planning to take leave within the first year of the loan, a few lenders will reduce the income they assess, while others won't factor it in at all if the leave is more than six months away. If this applies to your situation, it's worth discussing before you start looking at properties.

Another option is to include a guarantor, typically a parent who uses equity in their own home to support your application. This can help you borrow more or avoid LMI, but it also means the guarantor is liable if you can't meet repayments. Most lenders limit the guarantee to the portion of the loan above 80%, and they'll require the guarantor to receive independent legal advice before proceeding.

Call one of our team or book an appointment at a time that works for you. We'll calculate your borrowing capacity across multiple lenders, explain what's limiting it, and show you what changes would make the most difference before you apply.

Frequently Asked Questions