How Lenders Calculate What You Can Borrow
Borrowing capacity is the maximum loan amount a lender is prepared to offer based on your income, expenses, existing debts, and their serviceability criteria. Every lender calculates this differently, which is why the same applicant can receive different pre-approval amounts from different institutions.
Lenders assess your ability to service a loan by applying a buffer to the interest rate. Under APRA requirements, all authorised deposit-taking institutions must assess your capacity to repay at an interest rate that is at least 3.0 percentage points above the loan product rate. This buffer has been in place since October 2021 and remains current. If you apply for a variable rate loan at 6.2 per cent, the lender will assess whether you can afford repayments at 9.2 per cent or higher. This protects both you and the lender if rates rise after settlement.
Consider a household applying for an owner-occupied home loan with a combined gross income of $140,000. They have a car loan with $18,000 remaining, a combined credit card limit of $15,000, and monthly living expenses of around $3,200. The lender will calculate their net income after tax, subtract all ongoing commitments including the credit card limit (not the balance), subtract a benchmark or declared living expense figure, and apply the serviceability buffer to determine how much they can borrow. In this scenario, depending on the lender's policy, the approved loan amount might vary by $50,000 to $80,000 between institutions.
Your borrowing capacity is not static. It shifts with changes to your income, debts, dependents, living costs, and lender policy. It also shifts when APRA adjusts the serviceability buffer or when lenders tighten their internal credit policies in response to economic conditions.
Why Two Applicants with the Same Income Can Borrow Different Amounts
Income is only one part of the calculation. Two applicants earning $95,000 each can receive vastly different borrowing capacity assessments based on their financial commitments and household structure.
Lenders treat credit card limits as a liability regardless of the balance. If you have a card with a $20,000 limit and a zero balance, the lender assumes you could draw the full $20,000 at any time and includes a monthly repayment obligation in their assessment. Personal loans, car loans, and other credit commitments are treated as ongoing obligations even if they will be paid off within a few months. Buy now, pay later accounts are also included in most serviceability assessments.
The number of dependents affects your assessed living expenses. A single applicant with no children will have a lower living expense benchmark than a couple with two dependents, even if their declared expenses are similar. Lenders use either your declared expenses or a household expenditure measure, whichever is higher. The household expenditure measure is based on data from the Australian Bureau of Statistics and varies by income, location, and household size.
Employment type also influences the assessment. A borrower on a permanent salary will have their base income assessed in full. A casual employee may have their income discounted or require a longer employment history to satisfy the lender's criteria. Self-employed applicants generally need two years of tax returns, and their income is averaged or assessed at the lower of the two years depending on lender policy.
The Debt-to-Income Limit That Came Into Effect in 2026
APRA activated a debt-to-income lending limit on 27 November 2025, effective from 1 February 2026. Each authorised deposit-taking institution may lend up to 20 per cent of new owner-occupier loans and up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. The limits apply separately to owner-occupier and investor lending and apply to new lending only.
This does not mean you cannot borrow more than six times your income. It means that if your total debt exceeds six times your gross income, your application falls within the 20 per cent allocation the lender has available for higher DTI loans in that quarter. Some lenders will accommodate this without issue. Others may apply stricter criteria or decline the application if they have already reached their quarterly limit.
For a borrower with a gross household income of $120,000, a DTI of six would represent total debt of $720,000. If that borrower is applying for a $650,000 home loan and has $80,000 in other debts, their total debt would be $730,000, placing them just above the threshold. Whether the application is approved depends on the lender's appetite and their current allocation under the APRA cap.
Non-authorised deposit-taking institutions are not subject to this limit, which is one reason working with a broker who has access to a wide panel of lenders can make a material difference to your outcome.
What You Can Do to Improve Your Borrowing Capacity
Reducing your credit card limits is one of the most direct ways to increase how much you can borrow. If you have cards you no longer use, close them. If you have high limits on active cards, contact the issuer and request a reduction to an amount that reflects your actual usage. A borrower with three cards totalling $35,000 in limits could increase their borrowing capacity by $80,000 or more simply by reducing those limits to $10,000.
Paying off small debts before applying can also help. If you have a personal loan or car loan with only a few months remaining, paying it out before lodging your application removes that liability from the serviceability assessment. Even if the debt would be cleared before settlement, most lenders will still include it in their initial assessment unless you provide evidence that it has been fully discharged.
Increasing your deposit reduces the loan amount required and may also reduce or eliminate the need for lenders mortgage insurance. LMI applies when your loan-to-value ratio exceeds 80 per cent. The premium is calculated on a sliding scale and can add thousands of dollars to your upfront costs. Moving from a 90 per cent LVR to an 80 per cent LVR removes that cost entirely and may also give you access to better interest rates.
If you are self-employed, ensure your tax returns reflect your actual income. Some business owners minimise their taxable income for tax purposes, but this directly reduces the income figure a lender can use to assess your application. Speak with your accountant about structuring your income in a way that balances tax efficiency with borrowing capacity, particularly in the year or two before you plan to apply for a home loan.
Consolidating multiple debts into a single loan with a lower repayment can improve your serviceability position, but only if the consolidated loan has a lower monthly repayment than the sum of the individual debts. Debt consolidation that extends the loan term without reducing the monthly commitment will not improve your borrowing capacity and may reduce it if the total debt increases.
How Different Loan Structures Affect What You Can Borrow
The loan structure you choose affects how much you can borrow. A principal and interest loan will generally allow you to borrow more than an interest-only loan because the repayment is lower during the interest-only period, but lenders assess interest-only loans at the higher principal and interest repayment or apply a separate serviceability test.
A fixed rate loan is assessed at the fixed rate plus the serviceability buffer, while a variable rate loan is assessed at the variable rate plus the buffer. If fixed rates are higher than variable rates, your borrowing capacity may be lower on a fixed rate loan. A split loan is assessed using the weighted average rate of the fixed and variable portions plus the buffer.
If you are applying for an investment loan, lenders will include rental income in the assessment but typically apply a shading factor of 20 per cent to account for vacancies and maintenance costs. This means that if the property generates $500 per week in rent, the lender will assess it at $400 per week. Investment loans are also assessed at a higher interest rate than owner-occupied loans, which reduces borrowing capacity further.
For clients considering a construction loan, lenders assess your capacity to service the full loan amount from the date of approval, even though funds are drawn progressively during the build. You may also need to demonstrate your ability to cover rent or your current mortgage while construction is underway, depending on your circumstances. More detail on how construction lending works is available on our construction loans page.
Why Pre-Approval Matters and What It Actually Tells You
Pre-approval gives you a clear understanding of how much you can borrow before you start looking at properties. It is not a guarantee, but it is a formal assessment based on your current financial position and the lender's current credit policy.
Most pre-approvals are valid for three to six months, depending on the lender. During that time, your financial position must remain materially the same. If you change jobs, take on new debt, or experience a reduction in income, the pre-approval may no longer be valid and the lender may reassess your application before proceeding to formal approval.
Pre-approval also allows you to move quickly when you find a property. In a market where good properties attract multiple offers, having your finance in place means you can make an offer with confidence and a shorter finance clause. Sellers and agents take pre-approved buyers more seriously because the risk of the sale falling through due to finance is lower.
You can obtain pre-approval directly from a lender or through a mortgage broker. Working with a broker gives you access to multiple lenders and allows you to compare borrowing capacity across different institutions without making multiple applications. Each lender has different serviceability policies, and a broker can identify which lender is most likely to approve your application at the amount you need. You can read more about home loan pre-approval and how it fits into the purchase process.
When applying for pre-approval, you will need to provide proof of income, details of your assets and liabilities, and information about your living expenses. The lender will also conduct a credit check. If your credit file contains defaults, missed payments, or multiple recent credit enquiries, this may affect your application. If you are unsure about your credit position, you can request a copy of your credit file before applying.
Understanding your borrowing capacity is about more than knowing a number. It is about knowing how that number is calculated, what influences it, and what you can do to improve it. When you understand the assessment process, you can make informed decisions about your finances, your property search, and your loan structure. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How do lenders calculate borrowing capacity?
Lenders assess your income, subtract your expenses and existing debts, and test your ability to service the loan at an interest rate at least 3.0 percentage points above the actual loan rate. Every lender uses different serviceability criteria, which is why the same applicant can receive different pre-approval amounts from different institutions.
What is the debt-to-income limit that applies to home loans?
From 1 February 2026, APRA limits authorised deposit-taking institutions to lending no more than 20 per cent of new owner-occupier loans and 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. This does not prevent you from borrowing more than six times your income, but it does mean your application falls within a capped allocation.
Why do credit card limits reduce my borrowing capacity?
Lenders treat your credit card limit as a potential debt regardless of your balance. If you have a card with a $20,000 limit and a zero balance, the lender assumes you could draw the full amount at any time and includes a monthly repayment obligation in their serviceability assessment.
Can I improve my borrowing capacity before applying for a home loan?
Yes. Reducing or closing unused credit cards, paying off small debts, increasing your deposit, and ensuring your income is accurately reflected in your tax returns can all improve your borrowing capacity. Even small changes to your financial position can increase your approved loan amount significantly.
How long does pre-approval last?
Most pre-approvals are valid for three to six months, depending on the lender. During that time, your financial position must remain materially the same. If you change jobs, take on new debt, or experience a reduction in income, the lender may reassess your application before proceeding to formal approval.
