Borrowing Power Explained
Ask two people with the same income how much they can borrow for a home loan, and you'll often get two very different answers. Borrowing power is the maximum amount a lender is willing to lend you, and while your income is a major factor, it's rarely the only one
In this guide, we'll walk through the main factors that affect borrowing capacity, and practical steps that can help you put yourself in a stronger position before you apply.
What "Borrowing Power" Actually Means
Borrowing power, sometimes called borrowing capacity, is the maximum amount a lender is willing to let you borrow, based on their assessment of your income, expenses, and financial commitments. It's separate from your deposit and the price of a property you're considering. You might have a healthy deposit saved, but your borrowing power is what determines the size of the loan a lender will approve.
It's also worth remembering that borrowing power isn't necessarily what you should borrow. A lender's assessment gives you the maximum the numbers allow, but it doesn't always reflect your own spending habits, lifestyle costs, or future plans. Treat the figure as a ceiling to work within, rather than a target to hit.
How Income Is Assessed (PAYG vs Self-Employed)
For PAYG employees, lenders typically build assessable income from a mix of sources:
Base salary: Your ongoing wage or salary, usually the starting point for PAYG assessment.
Overtime, commissions and bonuses: Lenders usually only count these if you can show a consistent history (generally over the past 6-12 months), and even then they're often "shaded" (discounted to a percentage, commonly around 80%) because they can fluctuate.
Allowances: Regular allowances, such as a car or shift allowance, can sometimes be included, again subject to a consistent history.
Second jobs or casual income: Additional income streams can be considered, though lenders will usually shade this (often around 80% of the annual amount) and look for a track record of at least a few months.
Most lenders will also want recent payslips alongside your income statement (or PAYG payment summary) and may ask for a letter from your employer confirming your role is ongoing, particularly if you're still on probation.
Self-employed borrowers are assessed differently. Lenders typically verify income through full doc or alt doc pathways.
Full doc loans commonly use:
Notice of Assessment (NOA) and/or Income Tax Returns (ITR): Usually the last two years' worth, used to establish an average or trend in taxable income.
Company financials: Profit and loss statements and balance sheets, often for the last two years, which show how the business is performing.
Director's payslips: Accepted by some lenders to help verify income; others rely only on the documents above.
Alt doc loans can help when full doc paperwork isn't available, or doesn't reflect current income. They may use:
BAS (Business Activity Statements): Usually the last two quarters' worth, used to verify the business's reported turnover.
Accountant's letter: A signed letter from your accountant confirming your income.
Business bank account statements: A review of the business's trading account to verify cash flow and turnover.
Policies vary between lenders, so the documents that work well with one lender may differ with another.
Existing Debts and Liabilities
Lenders don't only look at what you currently owe. They also look at what you could draw on. That is why existing debts and liabilities can affect borrowing power more than people expect. Common items include:
Credit cards: Assessed on the full limit, not the balance you're carrying. As a rough guide, many lenders reduce borrowing capacity by about three times the total credit card limit (exact treatment varies).
Personal loans and car loans: Ongoing repayments reduce income counted as available for a new loan. For personal loans, the impact can often be roughly three to five times the current balance, depending on the lender.
HECS/HELP debt: Treated as an existing liability. Compulsory repayments reduce the monthly income a lender uses in their calculation.
Other mortgages or investment property loans: Loans against other properties are included, sometimes with adjustments for rental income. Many lenders also apply a further interest-rate buffer (commonly around 3%) on those investment loans.
Policy differences and investment income: Lender policies can differ a fair amount on investment property loans. Some take a different approach to buffers or rental income altogether, which is where comparing lenders carefully can matter, especially if you hold more than one investment property.
Buy Now Pay Later (BNPL) facilities: Increasingly assessed in a similar way to other short-term credit, even when limits are small.
Living Expenses, the HEM Benchmark, and Number of Dependents
For living expenses, lenders generally use whichever is higher: the expenses you declare, or the Household Expenditure Measure (HEM), a benchmark based on average living costs for Australian households. HEM acts as a minimum floor if your declared expenses come in lower.
HEM isn't one fixed number. It moves mainly with household size and income level. A larger household usually pushes the benchmark higher, and a higher income can also raise it slightly, on the basis that spending often rises with income
The Interest Rate Serviceability Buffer
Most lenders apply a buffer of around 3% on top of the actual loan rate used in their assessment. This isn't a rate you'll necessarily pay. It's a safety margin that tests whether you could still afford the loan if rates were higher.
Those buffered repayments feed into the borrowing calculation alongside income, expenses, and other debts. Because the buffer increases assessed repayments, it usually reduces how much you can borrow compared with using the actual rate alone.
Credit History and Credit Score
Credit history can affect both how much you can borrow and which lenders will consider your application. In some cases, certain credit histories mean you won't be eligible with some banks at all.
People with a lower credit score, or a history of missed payments, defaults, or other credit issues, often need to look at non-bank lenders. Those lenders have their own product ranges, and placement usually depends on the severity of the credit history. Generally, more difficult credit histories come with higher interest rates and fees.
This is an area Antigona Finance regularly helps with: supporting clients who've had a harder time getting approved to explore lenders and loan structures that may suit their situation.
Deposit Size and Loan-to-Value Ratio (LVR)
Your deposit size directly affects your Loan-to-Value Ratio (LVR), the percentage of the property's value you're borrowing. A smaller deposit means a higher LVR, and higher LVR tiers often come with higher interest rates because the lender is taking on more risk.
Once you have at least a 20% deposit (an LVR of 80% or below), you're usually in a stronger position for more competitive pricing compared with higher-LVR products, though pricing still depends on the lender, product, and your overall profile.
Loan Term and Repayment Type
When assessing borrowing power, most lenders calculate repayments on a principal-and-interest basis, even if you're applying for an interest-only period. Interest-only periods are temporary, and lenders want comfort that you could still afford the loan once it reverts to principal and interest.
Loan term matters too. A shorter term usually means higher assessed repayments (because the loan is repaid over fewer years), which can lower the borrowing amount.
Why Borrowing Power Differs Between Lenders
Borrowing power can differ between lenders for several reasons. A big one is how each lender treats income sources: what they count, and how much of it they count.
For example, some lenders may be better positioned for a self-employed borrower who pays themselves a healthy director's wage, while others may be more suited to essential service workers (such as police officers or nurses) with significant overtime. Certain lenders view these profiles more favourably and may count more of that income as a result.
Serviceability buffers can also differ. Some lenders apply a smaller buffer (for example around 1% or 2% instead of the more common ~3%), though that can come with a higher customer interest rate.
These nuances are exactly where a mortgage broker can help. At Antigona Finance, we work across a panel of lenders and understand how assessment policies can differ. If you don't fit a traditional employment mould, you can contact us at info@antigonafinance.com.au or use the contact form and one of our brokers will get in touch with you.
Practical Ways to Improve Your Borrowing Power
A few practical steps can strengthen your borrowing position before you apply:
Pay down existing debts: Reducing personal loans, car loans, or credit card balances lowers the ongoing commitments a lender counts against you.
Lower unused credit card limits: Because lenders often assess the full limit rather than the balance, unused limit can still reduce borrowing power.
Increase documented income: Where the increase is genuine and verifiable, lenders need evidence on paper (such as payslips, an updated employment contract, or recent tax returns) before they'll count higher income.
A mortgage broker can also help you prepare and present income and liabilities in a clear, lender-ready way.
Understanding what drives borrowing power makes planning clearer, whether you're buying, refinancing, or simply checking where you stand in today's lending environment.
If you'd like a clearer picture of how lenders may assess your situation, reach out to Antigona Finance for a consultation today.
FAQ
How is borrowing power calculated in Australia?
Lenders calculate borrowing power by assessing your income, living expenses (using whichever is higher between your declared expenses and the HEM benchmark), existing debts, and applying an interest rate buffer (typically around 3%) to assessed repayments. Together, these factors determine the maximum amount they're willing to lend.
Does my credit card limit affect my borrowing power even if I don't use it?
Yes. Lenders generally assess credit card commitments on the full limit, not the balance you're carrying, so an unused card can still reduce borrowing power.
Does my HECS or HELP debt reduce how much I can borrow?
Yes. Even though it isn't a traditional loan, compulsory HECS/HELP repayments are treated as a liability and reduce the monthly income used in the calculation.
Why did two different lenders give me two different borrowing power amounts?
Different lenders assess income sources differently and can apply different serviceability buffers, so the same person can receive different borrowing amounts depending on the lender.
Can I increase my borrowing power without increasing my income?
Often, yes. Paying down existing debts, lowering unused credit card limits, and reducing other liabilities can all improve borrowing power without a higher income.
Does having dependents reduce my borrowing power?
It can. A larger household generally raises the living-expense benchmark lenders use, which can reduce the amount you're assessed as able to afford.
Can self-employed individuals get a home loan without two years of tax returns?
In some cases, yes. Alt doc pathways can allow income to be verified through alternatives such as BAS statements, an accountant's letter, or business bank statements, rather than relying solely on tax returns. Availability and criteria vary by lender.
This information is general in nature only and does not take into account your personal objectives, financial situation, or needs. It should not be relied upon as personal financial or credit advice, please seek independent professional advice before making a decision based on this information. If you'd like more personalised information about your borrowing potential, reach out to us directly for a consultation.
Antigona Finance is a Corporate Credit Representative 576679 of Australian Credit Licence 384704.
