How Much Could I Borrow?
Learn how lenders calculate your borrowing capacity — including income assessment, living expenses, deposit requirements and the stress test — so you can plan your property search with a realistic budget.
Key Takeaways
- Core formula: Lenders start with gross income, subtract tax, living expenses and existing debts, then apply a stressed repayment rate to calculate the loan you can service.
- Income verification matters: Payslips and tax returns directly affect assessed capacity. Unverified or irregular income usually reduces your quoted borrowing power.
- Living costs: Banks use whichever is higher — HEM or your declared expenses. Track receipts and bank statements to support lower actual outgoings.
- Deposit & LVR: Your deposit sets a hard ceiling on purchase price. Crossing 80% LVR typically triggers Lenders Mortgage Insurance (LMI) and reduces effective borrowing power.
- Next step: Gather payslips, bank statements and bills, reduce revolving debt, and prepare documents to seek a conditional pre-approval.
What Lenders Look At When Calculating Borrowing Power
Lenders run a serviceability test: they check whether your monthly income can comfortably cover repayments at a higher assessment rate. The calculation works like this:
The lender converts a higher assessment rate into a monthly repayment figure, then checks whether your surplus covers it. Passing means the loan meets serviceability; failing reduces the approved amount. This is why pre-approval is conditional and tied to lender rules — not just today's advertised rate.
Example: How the numbers add up
A household earning $8,000/month might lose $5,500 to tax and living costs, with $500 going toward existing debts — leaving a $2,000 surplus. The lender stress-tests that $2,000 against repayments at their assessment rate. Pass the test and the loan is serviceable; fall short and the approved amount is reduced.
Income Types Lenders Accept
- Salary and wages Recent payslips plus an employment letter or group certificate. Lenders verify year-to-date earnings against reported income.
- Overtime and bonuses Accepted when regular and supported by payslips. Lenders typically average overtime over a period to assess reliability.
- Rental income Declared on tax returns with deductions applied. Lenders usually discount for vacancy and maintenance costs.
- Government payments and pensions Verified by official statements. Some benefits count; others may be excluded or treated more conservatively.
- Self-employed income Assessed via 1–2 years of tax returns and notices of assessment. Lenders may use averaged or adjusted figures depending on reported profits.
Existing Debts That Reduce Capacity
Lenders tally minimum credit card repayments, personal and car loans, HELP/HECS debts, and some buy-now-pay-later arrangements. If a facility shows a limit but no repayment history, lenders typically assume around 3% of the credit card limit as a monthly liability. Reducing these commitments before applying is one of the most direct ways to increase your assessed capacity. Use our Borrowing Capacity Calculator to see how these inputs change your result.
How Living Expenses and HEM Change Your Result
HEM is a benchmark, not a personal budget. The Household Expenditure Measure (HEM) is an ABS-based estimate of typical household spending, scaled by household size and postcode. Most lenders use whichever is higher — HEM or your declared actuals.
| Household Type | Typical HEM Range (per month) |
|---|---|
| Single adult | $1,200 – $1,800 |
| Couple (no children) | $2,100 – $3,000 |
| Couple + 2 children | $3,200 – $4,500 |
Figures are indicative and vary by location. For more detail, see the Household Expenditure Measure guide.
How to present lower, documented living costs
- Provide at least 3 months of clean bank statements
- Explain one-off large payments with supporting statements — exclude them from rolling averages
- Cancel unused subscriptions and close redundant cards before applying
- Allow a few weeks for those changes to show on statements
- Always disclose adjustments to your lender or broker — transparency speeds assessment
Cleaner, verified living costs can improve your estimate, though lenders will still apply assessment rates and buffers — so gains are measured rather than dramatic.
How Deposit, LVR and LMI Set a Hard Ceiling
Your deposit directly caps the purchase price you can offer:
If you can service a $700,000 loan but only have a $50,000 deposit, the most you can bid is $750,000 — regardless of your income. Plan deposit size before you bid to avoid last-minute surprises.
LVR Scenarios at a Glance
Worked Example: The LMI Impact
On an $800,000 purchase:
- 20% deposit ($160,000): Loan = $640,000. No LMI. Repayments tested on $640,000.
- 5% deposit ($40,000): Loan = $760,000 at 95% LVR. LMI premium ≈ $20,000–$30,000 capitalised. Repayments now tested on ~$785,000 — which can exceed serviceability limits even if income appeared sufficient before LMI was applied.
For a clear explanation of when LMI applies and how premiums are calculated, see Lenders Mortgage Insurance basics (Canstar).
Quick Calculation: Estimating How Much You Could Borrow
Work backwards from what you can afford each month. Estimate your net monthly income after tax, subtract living costs and monthly debts to find the available repayment amount, then convert that figure into a loan size using a repayment-per-$100,000 factor.
Repayment per $100,000 — Common Stressed Rates (30-year P&I)
| Assessment Rate | Monthly Repayment per $100,000 | Example: $2,000 surplus → loan |
|---|---|---|
| 7.5% | ~$700 | ~$286,000 |
| 8.5% | ~$769 | ~$260,000 |
| 9.25% | ~$823 | ~$243,000 |
Figures are a guide only. Confirm precise calculations using the Borrowing Capacity Calculator or a spreadsheet PMT function — see this PMT guide for instructions.
Worked Examples
$90,000 gross income
~$5,700 net/month. HEM $1,800. No existing debts. Surplus ≈ $3,900. At 8.5% assessment rate: 3,900 ÷ 769 ≈ 5.07 × $100,000.
$165,000 combined income
~$10,333 net/month. HEM $3,200. $400 car loan. Surplus ≈ $6,733. Result ranges from ~$818k (9.25%) to ~$962k (7.5%).
Rental income + existing mortgage
Rental income is discounted for vacancy and costs. The existing loan reduces surplus directly. Read our investor borrowing capacity guide for detail.
These examples are illustrative. Different lenders use different HEM rules, assessment rates and rounding conventions — results vary. Always test across multiple lenders or use a broker to get a realistic range.
Why Different Lenders Return Different Answers
Quoted borrowing capacity can vary substantially between lenders — sometimes by $50,000–$100,000+ on the same income — because:
- Different assessment rates and floors A stricter assessment rate means higher stressed repayments and a lower maximum loan for the same surplus. Testing several lenders reveals your realistic range.
- How living costs are treated Some lenders use HEM; some accept well-documented declared actuals; others apply discretionary uplifts. If your spending is low and evidenced, a lender that accepts actuals will typically give more capacity.
- Loan features and structure A longer term increases today's capacity but increases lifetime interest. Interest-only repayments may face stricter assessment rules. A recognised offset account can lower assessed repayments, improving your result. Run side-by-side scenarios before choosing a product.
Working with a broker or testing multiple lenders helps you match your situation to the lender with the most suitable policies for your circumstances. See how loan structure and refinancing strategy can also affect long-term costs.
Action Plan: Steps to Improve Borrowing Power and Prepare for Pre-Approval
Quick Wins
- Pay down credit card balances to reduce monthly commitments
- Reduce visible credit limits where possible
- Avoid new credit checks — don't apply for new cards or loans
- Gather 3 months of clean bank statements
- Consolidate expensive debts where appropriate
Structural Moves
- Boost deposit to avoid LMI and improve LVR position
- Stabilise additional income streams with documented evidence
- Consider a guarantor if it suits your family situation
- Restructure existing loans to lower monthly repayments
- Build consistent savings history for genuine savings evidence
Documents to Prepare for Pre-Approval
For a complete guide to what you'll need, see this mortgage document checklist (Experian). With complete documents, conditional pre-approval for straightforward PAYG cases can arrive within hours to a few days. Complex income or guarantor scenarios may take 1–2 weeks.
Common Pre-Approval Conditions to Expect
- Satisfactory property valuation
- Verified deposit (genuine savings or gift letter)
- Employment confirmation at time of purchase
- Clean credit check — no new debts after assessment
Meeting these conditions promptly keeps the pre-approval valid while you search. Keep copies of all documents in an organised folder to share with your lender or broker on request.
Get Your Borrowing Estimate — Free 20-Minute Review
Bring three months of bank statements and recent payslips. We'll produce a practical pre-approval strategy tailored to your situation — including three realistic lender options.