Borrowing Capacity Explained
How do lenders work out how much I can borrow for a home loan?
By Andrew, franklenn FINANCE 7 min readUpdated 3 November 2026
The short answer
Your borrowing capacity is the maximum a lender is willing to lend you, based on whether you could still afford the repayments if interest rates rose. Lenders look at your income, living expenses, existing debts, credit card limits and number of dependants, then test repayments at an assessment rate usually around 3% above the actual rate. Different lenders use different calculators, so the amount you can borrow can vary noticeably from one lender to the next.
Detailed explanation
What goes into the calculation
Every lender has its own serviceability calculator, but they all start with the same building blocks. They take your income, subtract your living expenses and existing commitments, and check whether what is left covers the new loan repayments with room to spare.
Your borrowing capacity is not a single fixed number. It moves with your income, your spending, interest rates and the policy of each lender.
- Income: salary, overtime, bonuses, rental income, business income and some government payments
- Living expenses: the higher of your declared spending or the lender's benchmark
- Existing debts: car loans, personal loans, HECS-HELP and other home loans
- Credit card limits: assessed on the limit, not the balance
- Dependants: more dependants means higher assumed living costs
The serviceability buffer
Australian lenders do not test your repayments at today's rate. Under guidance from the banking regulator APRA, they generally add a buffer of around 3 percentage points. So if your loan rate is 5.89%, the lender checks whether you could afford repayments at about 8.89%.
This is designed to make sure you can cope if rates rise. It is also the main reason your borrowing capacity can feel lower than you expected.
Lenders also apply this buffer to your existing debts in some cases, such as other home loans or investment loans, which is why investors with several properties often see their capacity shrink faster than expected.
Why different lenders give different answers
Lenders treat income and expenses in different ways. One lender might count 100% of your overtime while another counts 80%. One might use a higher living expense benchmark for your household size. Some lenders are more generous with rental income or self-employed income.
That is where a broker earns their keep. We can compare how lenders on our panel are likely to assess your situation, rather than relying on one bank's calculator.
Lenders also compare your declared living expenses against a benchmark, often the Household Expenditure Measure (HEM), and use whichever is higher. If your spending is genuinely low, the benchmark will usually apply anyway, so cutting back for a month or two will not always change the result.
How to improve your borrowing capacity
Small changes can make a real difference. Reducing debts and credit limits often has a bigger effect than people expect, because lenders assume you could max out a credit card at any time.
- Reduce or close credit cards you do not need
- Pay off small personal loans or car loans where it makes sense
- Keep your spending steady and well documented for a few months before applying
- Consider a longer loan term, which lowers the assessed repayment
- Make sure all your eligible income is included and documented
Capacity is not the same as comfort
The maximum you can borrow and the amount you should borrow are two different questions. We encourage clients to look at the repayments against their real life, including kids, holidays, car replacement and savings goals.
A loan you can comfortably hold through a rate rise or a change in income is usually a better outcome than the biggest loan you can get approved.
Worked example
How the buffer changes the test on a $600,000 loan
Here is an illustrative example of how a lender's serviceability buffer works on a $600,000 loan over 30 years with principal and interest repayments.
| Loan amount | $600,000 |
| Actual interest rate | 5.89% p.a. |
| Actual monthly repayment | $3,554.98 |
| Assessment rate (actual + 3%) | 8.89% p.a. |
| Assessed monthly repayment | $4,780.32 |
| Difference the lender needs you to cover | $1,225.34 a month |
Even though the real repayment is about $3,555 a month, the lender wants to see that your budget can handle about $4,780. That gap of roughly $1,225 a month is why borrowing capacity is often lower than people expect.
Illustrative only. Figures are examples, not a quote or a recommendation.
Common mistakes
- Relying on one bank's online calculator and assuming every lender will say the same
- Keeping unused credit cards open, which reduce capacity based on the full limit
- Understating living expenses on an application, which can lead to delays or a decline
- Applying with several lenders at once and adding multiple enquiries to your credit file
- Borrowing the maximum without testing the repayments against your actual budget
Frequently asked questions
Next steps
Talk to franklenn FINANCE
Want a realistic picture of what you can borrow across multiple lenders? Book a free discovery call with franklenn FINANCE and we will compare it for you.
This guide is general information only and does not consider your objectives, financial situation or needs. It is not financial, tax or legal advice. Lender policies, rates and government schemes change. Please speak with us, and with your accountant or solicitor where relevant, before acting.