How Is Borrowing Capacity Calculated?
Lenders calculate borrowing capacity by assessing your gross income, existing debt commitments, household living expenses, and applying an interest rate serviceability buffer.
How do lenders calculate borrowing capacity?
Australian lenders calculate borrowing capacity through serviceability assessments that evaluate your total gross household cash flow. They analyze your primary PAYG salary alongside secondary income sources like rental returns or tax benefits, though variable income such as overtime or bonuses is often shaded at 80%.
Next, lenders deduct your existing financial commitments. This includes personal loans, car leases, HECS-HELP debts, and credit card limits. Crucially, credit cards are assessed on their total approved limit—typically assuming a monthly repayment of 3% of the limit—even if you clear the balance in full every month.
Household living costs are then assessed against your declared living expenses or the Household Expenditure Measure (HEM) benchmark, whichever is higher. To ensure ongoing affordability, APRA mandates that lenders apply an interest rate serviceability buffer, generally adding 3 percentage points to the current loan interest rate.
Because individual credit providers apply different expense benchmarks, policy rules, and income assessment criteria, your maximum borrowing capacity will vary significantly from one institution to another. A Lonix broker can compare lenders across the market and help structure your loan to suit your financial circumstances.
Related questions
- How does a credit card limit affect borrowing capacity?
- Lenders assess credit cards based on their total approved limit rather than the balance you owe, treating roughly 3% of the limit as a monthly liability. Reducing or closing unused credit card limits can significantly increase your overall borrowing power.
- What is the serviceability buffer in Australia?
- The serviceability buffer is an additional interest rate percentage—currently set at 3% by APRA—added to the loan rate during assessment. This ensures borrowers can maintain repayments if interest rates increase.
- How do lenders calculate household living expenses?
- Lenders require a detailed declaration of your actual living expenses and compare this figure against the Household Expenditure Measure (HEM) benchmark. They will use whichever amount is higher to determine your ongoing cash flow.
- Does HECS or HELP debt reduce my borrowing capacity?
- Yes, compulsory HECS/HELP repayments reduce your net take-home income, which directly lowers your serviceability capacity. Lenders factor these statutory repayments into your monthly debt obligations during the assessment.