How borrowing power works in Australia

Your borrowing power — also called borrowing capacity — is the maximum amount a bank will lend you for a home loan. It's not just a multiple of your income. Australian lenders run your finances through a detailed serviceability test designed to make sure you can still afford repayments even if rates rise.

What banks look at

Lenders assess your gross income (salary, rental income, bonuses — often shaded down to 80%), take out tax, Medicare and any HECS/HELP repayment, then subtract your living expenses and existing debts (car loans, credit cards). They then apply a serviceability buffer — typically 3% above the loan's actual interest rate — to work out whether you could still pay if rates went up.

The living-expense benchmark

Lenders don't accept your declared expenses at face value. Most use a benchmark such as the Household Expenditure Measure (HEM), published by the Melbourne Institute, and take the higher of what you declare or their benchmark. APRA does not set a national dollar amount, each lender chooses how to apply it, and the figures are re-based periodically — so there is no single HEM number that applies to your application. Ask your lender or broker which benchmark they use and what it comes to for a household your size. Declaring realistic expenses is critical: if you under-declare and the bank finds out, your application may be declined.

Serviceability buffer

APRA requires lenders to add at least 3 percentage points to the product rate when testing serviceability. If the loan is priced at 6%, the bank tests whether you could still pay it at 9% — a 3-point buffer. That higher rate is used to work out your repayments; it is not the rate you pay. The higher the assessment rate, the lower your borrowing power — each extra point of assessment rate reduces the loan you can service by roughly 8–10%.

Term matters

Repayments are calculated over the whole loan term, so the term changes the answer materially. The same monthly budget services a larger loan over 30 years than over 15 years, because a shorter term means a bigger payment on each dollar borrowed. If a lender offers you a shorter term, check what that does to the monthly repayment before you accept it.

Tips to improve your borrowing capacity

• Pay down credit cards and personal loans. Lenders assess the card limit, not the balance, so an unused $10,000 limit still costs you capacity.
• Close unused cards. That old card in a drawer is still counted against you.
• Reduce living expenses (real ones — the bank will check statements).
• Apply with a partner to combine incomes, though dependents will raise the living-expense benchmark.
• Save a larger deposit. Crossing the 20% threshold avoids Lenders Mortgage Insurance (LMI), which adds thousands to your costs.