Lenders work out your capacity by taking your assessable income, subtracting your living expenses, existing debts and commitments, then testing whether what is left covers the repayment at a rate several percentage points above the one you would pay. That buffer is why the number is lower than people expect. Credit card limits, HECS and car loans reduce it more than most borrowers realise.
Two households on the same income routinely receive very different answers, and the reason is almost never the salary. It is the commitments sitting alongside it and how a particular lender treats them.
The stress-test buffer
Lenders do not assess whether you can afford the repayment at today’s rate. They assess whether you could afford it at a materially higher one — a serviceability buffer added on top of the actual rate, applied to your new loan and to your existing debts.
This is a regulatory requirement rather than a lender preference, and it exists so that borrowers are not ruined by ordinary rate movements. It is also the single biggest reason your capacity is lower than a simple repayment calculation suggests.
The practical consequence: your maximum loan is set by an interest rate you are not paying. Start with the borrowing power calculator, or the borrowing power by income calculator if you want to work from a salary figure.
What counts as income, and what gets discounted
Not all income is treated equally.
- PAYG salary is the gold standard, particularly with a completed probation period.
- Overtime, bonuses and commission are usually shaded — many lenders count only a portion, and want two years of history. Some industries are treated more generously than others.
- Casual and contract income generally needs a track record, often six to twelve months in the same role. See casual employment and contractor loans.
- Self-employed income is assessed on tax returns and financials, usually across two years, and lenders differ enormously here. See self-employed home loans.
- Rental income is typically counted at around 80%, to allow for vacancy and costs.
- Government payments vary; some lenders count family payments, others will not.
What reduces your capacity, in order of impact
Credit card limits
The most common and most fixable problem. Lenders assess your limit, not your balance, because you could draw the full amount tomorrow. An unused card with a high limit reduces your borrowing capacity by a surprising multiple of that limit.
Reducing limits or closing unused cards is the fastest lever most people have, and it takes days rather than years. Do it well before applying so the changes are reflected on your credit file.
Existing loans
Car loans, personal loans and buy-now-pay-later arrangements all consume capacity. A car loan in particular can reduce your borrowing power by many times its balance, because the repayment is large relative to the debt.
HECS or HELP debt
Compulsory repayments are an ongoing deduction from income and reduce capacity while the debt exists. Treatment varies between lenders, and it has been an area of active change — some are now more accommodating than others, particularly where the debt is close to being repaid. It is worth asking rather than assuming. See home loans with a HECS debt.
Dependants and living expenses
Lenders apply a benchmark for household living costs based on your family size and income, and use the higher of that benchmark or your declared expenses. Understating your spending does not help, because the benchmark provides a floor.
Why lenders disagree with each other
There is no single national assessment. Each lender sets its own buffer above the regulatory minimum, its own living expense benchmarks, its own treatment of overtime, bonuses, rental income and HECS, and its own view of casual and self-employed work.
The result is that the same application can produce materially different answers at different institutions — sometimes a difference large enough to change which properties you can consider. This is the main practical argument for looking beyond your own bank, particularly if your income is anything other than straightforward salary.
Being declined by one lender is not a verdict on your finances. It often means their policy does not fit your income structure. But repeated applications do leave marks on your credit file, so the sequence matters: work out where you fit first, then apply once.
How to improve it before you apply
- Reduce or close credit card limits you do not need. Fastest available gain, and the readiness check will tell you whether it is the one holding you back.
- Clear small consumer debts, especially car and personal loans, if you can do so without emptying your deposit.
- Stop using buy-now-pay-later for a few months before applying. It appears on statements and lenders take it seriously.
- Tidy your bank statements. Lenders read three to six months of them. Gambling transactions, dishonoured payments and irregular overdrafts all matter.
- Stay in your job through the application. Changing employers mid-process, even for more money, can stall an approval.
- Consider the loan term. A longer term reduces the assessed repayment and lifts capacity, at the cost of more total interest.
Common questions
There is no reliable multiple, because capacity depends on your debts, dependants, expenses and the lender’s buffer as much as your income. Two people earning the same amount can receive very different answers. Use a calculator for a range, then have it checked properly.
Yes, and by more than most people expect, because lenders assess the full limit rather than the balance. Reducing limits on cards you do not use is usually the quickest way to lift your capacity.
Yes, while the debt exists, because the compulsory repayment reduces your assessable income. How much it matters varies between lenders, and this is an area where policies differ and change, so it is worth comparing rather than assuming.
Usually yes, because the assessed repayment is lower over a longer term. It also means paying more interest overall, so it is a trade rather than a free gain.
Because each lender sets its own buffer, expense benchmarks and rules for income types like overtime, bonuses, rent and HECS. The differences can be substantial, particularly for self-employed or casual applicants.