How much you can borrow for a home loan depends less on a simple income multiple and more on what is left over each month after your living costs and other debts, tested at a higher “buffer” interest rate. Two people on the same salary can be approved for very different amounts, and different lenders can give the same person different answers.
This article is general information only and does not take your personal circumstances into account. It is not financial advice or a loan approval.
How do lenders work out how much I can borrow?
Lenders run a serviceability test. They start with your income, subtract your living expenses and the repayments on any existing debts, then check that the new loan’s repayments still fit, calculated at an interest rate at least 3 percentage points above the actual rate. If there is enough surplus left over, the loan passes.
The main inputs are:
- Income: base salary is usually counted in full. Overtime, bonuses, commission, rental income and self-employed income are often only partly counted, and each lender has its own rules.
- Living expenses: lenders use either your declared expenses or a benchmark for a household like yours, whichever is higher.
- Existing debts: car loans, personal loans, buy now pay later and HECS/HELP repayments all reduce your capacity. Credit cards are assessed on the limit, not the balance.
- Dependants: each dependant increases the living expenses a lender assumes.
- Loan structure: the loan term and whether you choose principal and interest or interest only.
What is the 3% serviceability buffer?
The serviceability buffer is a safety margin set by APRA, the banking regulator. Lenders must check that you could still afford your repayments if your interest rate were at least 3 percentage points higher than the rate you are actually offered. This protects you if rates rise, but it also means you are assessed on repayments higher than you will actually pay.
For example, on a $600,000 loan over 30 years (principal and interest):
| Scenario | Interest rate | Monthly repayment |
|---|---|---|
| What you would actually pay | 6.00% p.a. | about $3,597 |
| What the lender tests you on | 9.00% p.a. | about $4,828 |
The rates above are for illustration only. You can read APRA’s announcement on the serviceability buffer and lending limits.
What is a debt-to-income ratio, and does it cap my loan?
Your debt-to-income (DTI) ratio is your total debt divided by your gross annual income. If you earn $100,000 and your total debts, including the new home loan, add up to $600,000, your DTI is 6. APRA currently limits banks so that no more than 20% of their new home lending goes to borrowers with a DTI of 6 or more.
A DTI of 6 is not a personal borrowing cap, and it is not an automatic decline. However, some lenders become more selective above that level, so the choice of lender matters more if your borrowing is high relative to your income.
What reduces how much I can borrow?
- Credit card limits, even if the cards are paid off every month
- Car loans, personal loans and buy now pay later accounts
- HECS/HELP debt, because compulsory repayments reduce your take-home pay
- Dependants and higher declared living expenses
- Income that lenders only partly count, such as casual, overtime, bonus or recently self-employed income
- A shorter loan term, which increases the assessed repayment
How can I increase my borrowing power?
The fastest wins are usually reducing or closing credit cards you do not need, paying off small debts, and saving a bigger deposit. Applying with a partner adds a second income. Choosing the right lender also matters: lenders differ on how much overtime, bonus, rental and self-employed income they count, and on how they assess expenses.
- Cut unused credit card limits before you apply
- Clear or consolidate small personal loans and buy now pay later balances
- Review your regular spending in the three months before applying
- Avoid multiple formal applications, as each one can leave an enquiry on your credit file
- Ask a broker which lenders treat your type of income most favourably
Try the numbers yourself
Our loan calculators let you test repayments and costs, and the Moneysmart mortgage calculator shows how rate and term changes affect your repayments. Online calculators are a starting point only, because each lender’s assessment differs.
How SB Finance can help Hills District buyers
We compare borrowing capacity across 40+ lenders, so you can see which lenders will lend you the most and which offer the best overall deal, before you make an offer on a property. For home loans, there is no cost to you for our brokering service, as we are paid by the lender when your loan settles. Learn more about home loans and first home loans, or book a free consultation.
How much can I borrow: frequently asked questions
Does checking my borrowing power affect my credit score?
Using an online calculator or talking to a broker does not affect your credit file. A formal application or pre-approval usually results in a credit enquiry, which is why it pays to know which lender suits you before you apply.
Can my partner’s income be included?
Yes. If you apply jointly, lenders assess both incomes, as well as both applicants’ debts and expenses.
Does pre-approval guarantee I can borrow that amount?
No. Pre-approval is conditional. The lender will still need to approve the property itself, and your circumstances must not change before settlement.
Is borrowing the maximum a good idea?
Not always. The maximum a lender will approve is not necessarily what is comfortable for your budget. Leave room for rate changes, maintenance and life events.
