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How lenders calculate your borrowing power

September 23, 2019 10:00 am by Upside

If you’re new to the world of home loan lending, you might be wondering, “How much can I borrow?”. The answer depends on a number of factors that a lender will take into account to calculate your borrowing power, also known as your “serviceability”.

It’s important to have a clear understanding of your borrowing power as early as possible in the home buying process, as it will help determine your budget.

The basic borrowing capacity formula

Most lenders of home loans in Australia follow the same formula to calculate your borrowing power:

Gross income – tax – existing commitments – new commitments – living expenses – buffer = monthly surplus

This formula helps determine your ability to meet the loan repayments, based upon the loan amount, your income, expenses and other commitments.

To assess your loan application, a lender will take a detailed look at your income and your commitments, and then see how much you have left over to make loan repayments.

The types of things that are taken into account include:

  • Work income, rent from investment properties, family tax income and income from share investments.
  • Number of applicants and dependants.
  • Living expenses.
  • Credit card limits.
  • Personal/car loan repayments and payments on other mortgages.
  • Other liabilities like maintenance and HECS/HELP debt.

Keep in mind that even if you have a significant deposit and plenty of assets, it doesn’t automatically mean that you have the cash flow to make repayments on a new loan. Lenders want to see that you have enough positive cash flow each month to cover the cost of your repayments.

Lenders will assess your serviceability at a rate that is typically 2% to 3% above the actual interest rate that you initially agree to. For example, if your home loan interest rate is 4%, a lender might want proof that you could still make repayments even if the interest rate were 7%.

You can get a rough estimate of your borrowing power by using an online mortgage calculator.

RELATED: Preparing to apply for a home loan

How to increase your borrowing power

It’s a good idea to stick to a home loan that you could reasonably afford, even if the interest rate were to rise in the future. However, if you want to take your borrowing capacity up a notch, you can do this by either increasing your income or decreasing your expenses. Alternatively, you can save more so that you don't need to borrow as much.

Here are a few pointers to help boost your borrowing power:

  • Pay down your debts – If you have other loans, reducing your debt can increase your borrowing capacity.
  • Reduce your credit limit – Lenders will look at your total credit limit as a liability when applying for a home loan, even if you don’t have any outstanding debt. Consider reducing your credit limit or closing cards you don’t need.
  • Save more money – Saving more will not only lead to a bigger deposit, but lenders may also view your application more positively if they see you have a consistent saving record.
  • Improve your credit score – Make sure to pay your bills on time, as your repayment history will impact your borrowing capacity.
  • Talk to a mortgage broker – A licensed mortgage broker can help find you a suitable home loan by negotiating with a suite of lenders on your behalf.


Upside is an Australian-owned, full-service real estate agency with local real estate agents, low fixed fees and zero commission. Our standard is other agents’ ‘extras’, delivering vendors a complete agent managed service including a full appraisal, open home management, copywriting, photography, signage and advertising. It's the way real estate should be.

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