Borrowing power looks like it should be simple maths: income in, expenses out. Each lender runs your details through its own calculator with its own rules, though, and the rules differ. That works in your favour once you know which lender's rules suit you.
The buffer: why you're assessed at a rate you won't pay
Lenders don't just check whether you can afford the loan at today's rate. APRA, the banking regulator, expects them to test your repayments at a rate at least 3% above the one you'd actually pay. Offered 6%? You're assessed as if it were 9%. The buffer is there to protect you if rates rise, and it's a big reason the number a lender gives you can be lower than you expected.
Your living expenses
Lenders compare the living expenses you declare with a benchmark called HEM (the Household Expenditure Measure), which is based on your income and household, and they generally use whichever is higher. Understating your expenses doesn't help, because they'll fall back to the benchmark. Genuinely spending less in the months before you apply can, because your bank statements will show it.
The things that quietly reduce it
- Credit card limits. Lenders assess the limit, not the balance. A $20,000 limit you never use can reduce your borrowing power by tens of thousands of dollars, so closing or reducing unused cards is one of the easiest improvements you can make.
- HECS-HELP debt. Your compulsory repayments come off your income in the calculation. Depending on the balance, paying it off before you apply can make a real difference, but it isn't always worth it, so talk it through first.
- Buy now, pay later and personal loans. The repayments are small, but they reduce the surplus your loan is sized against.
Where lenders disagree most: your income
This is where the same person can get very different answers. Lenders treat each type of income differently:
- Overtime and allowances: some count all of it, some count around 80%, and some want two years of history.
- Bonuses and commission: some lenders are generous with these, others discount them heavily.
- Casual and contract work: the minimum time in the job ranges from a few months to two years, depending on the lender.
- Self-employed income: the widest variation of all. Lenders differ on one year of financials versus two and on what they'll add back, and some understand business owners far better than others.
- Probation: a deal-breaker for some lenders and not an issue for others.
When I run the same client across my lender panel, the gap between the most and least generous lender can be anything from tens of thousands to hundreds of thousands of dollars. Some lenders won't accept a type of income at all, while others count every dollar of it. If you only ask your own bank, you only get one set of rules.
What actually increases your borrowing power
- Close or reduce unused credit cards
- Clear small debts and buy now, pay later accounts
- Spend less for at least three months before you apply, so it shows on your statements
- Make sure all your income is documented the way lenders like to see it
- Apply with the lender whose rules suit your situation (that's the part I do)
Get a ballpark first
The borrowing power calculator on my homepage gives you a rough estimate using the 3% buffer and a benchmark for living expenses. Treat it as a starting point. The real answer is a range across more than 60 lenders, and where you land depends on which lender's rules fit your income. For repayments and the income lenders look for, see mortgage repayments and the income you need.
