How Your Borrowing Capacity is Calculated and What You Can Do to Increase It
Understanding how lenders calculate borrowing capacity is one of the most important steps a property buyer can take. Many buyers come to the market with an assumed budget based on income alone, only to discover that their actual borrowing power is quite different from what they expected, in either direction.
Here is what actually goes into that number, and the practical steps you can take to improve it before you apply.
The Income Side of the Equation
Lenders assess income differently depending on how it is earned. PAYG employees with a stable salary are the most straightforward to assess, but lenders also recognise a range of other income types including:
• Regular overtime and shift allowances (typically at 80% of the average over 2 years)
• Bonuses (typically at 50% of the average over 2 years)
• Rental income from investment properties (typically at 75 to 80% of gross rent)
• Family Tax Benefits and government income (accepted by most lenders up to the age of your youngest child)
• Self-employed income (based on taxable income from the most recent 2 years of tax returns)
Contractors and casuals are assessed more carefully. Lenders will generally want 12 to 24 months of consistent employment history before counting that income in the assessment.
The Expense and Liability Side
Every dollar you spend, owe, or have access to reduces your borrowing capacity. Lenders apply the Household Expenditure Measure (HEM) as a minimum benchmark, but if your declared expenses are higher, they use those instead.
Liabilities that reduce borrowing capacity include:
• Credit card limits: the full limit is counted as a liability, not just what you owe on it
• Personal loans and car finance, assessed on the monthly repayment
• HECS/HELP debt: repayment obligations are deducted from your assessable income
• Existing mortgages, including on investment properties
• Buy now, pay later commitments, which are increasingly captured in lender expense assessments
The Debt-to-Income Ratio
APRA guidance requires lenders to monitor debt-to-income (DTI) ratios. Most lenders apply an internal cap of 6 to 8 times your gross annual income. If your total proposed debt exceeds that threshold, approval becomes significantly harder regardless of your repayment capacity.
For a borrower earning $150,000 per year, a DTI cap of 7 means total debt cannot exceed $1,050,000. If they already have $150,000 left on a mortgage, their maximum new borrowing sits at around $900,000.
What You Can Do to Increase Your Borrowing Capacity
There are several practical steps that consistently move the number before you apply:
• Close unused credit cards and reduce limits on cards you keep
• Pay down existing personal loans and vehicle finance
• Avoid applying for new credit in the 6 months before your home loan application
• If you are self-employed, make sure your tax returns are lodged and reflect your full income
• Include all eligible income sources in your application with the right supporting documentation
Borrowing capacity is not fixed. With the right preparation and lender selection, the difference between a poorly structured and well-structured application can be significant, sometimes exceeding $100,000 in available credit.
Frequently Asked Questions
Do all lenders calculate borrowing capacity the same way?
No. Lender policy differs materially on income recognition, HEM benchmarks, and expense assessment. A mortgage broker can match your profile to the lender whose policy best suits your circumstances.
Can I borrow more if I have a co-borrower?
Yes. Adding a co-borrower increases the combined income assessed and can significantly increase your borrowing capacity, provided the co-borrower has a clean credit profile and stable income.
Speak with James Ryan to calculate your borrowing capacity and understand which lenders are most likely to approve your application. Call 0466 669 328 or visit azurafinancial.com.au
This article provides general information only and does not constitute financial, legal, or tax advice. Readers should seek professional advice in relation to their individual circumstances. James Ryan | Australian Credit Representative Number 562584 | Authorised under Australian Credit Licence 389328.
