How do banks calculate borrowing power in Australia?

Australian banks assess your borrowing power at the actual interest rate plus a 3% buffer (typically 9.5% total). They check that your income covers all debt repayments plus living expenses at the higher rate. They also check that your total debt doesn't exceed 6× your annual income (DTI ratio).

What reduces borrowing power?

Key factors that reduce borrowing power: existing debts (car loans, personal loans, credit card limits), dependants, high living expenses, HECS/HELP debt, and a small deposit (which adds LMI costs).

Finance Calculator

🇦🇺 Australia

Borrowing Power Calculator

How much can you borrow for a home loan? Uses a bank-style serviceability estimate with APRA's 3% interest rate buffer. Educational estimate only.

Used by 50,000+ users monthly · No sign-up required · Instant results

Your finances

Annual household income ($)

Combined gross income before tax

Monthly living expenses ($)

Food, transport, utilities, entertainment

Existing monthly debt repayments ($)

Car loans, personal loans, HECS repayments

Your deposit ($)

Savings available for deposit

💡 Assessment rate: 9.5% (market 6.5% + 3% buffer)

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Enter your income and expenses

This calculator uses the same bank-style assessment criteria Australian lenders apply — including a 3% interest rate buffer and HEM-inspired expense floor.

How Australian banks calculate borrowing power

When you apply for a home loan, Australian lenders assess your ability to repay at a rate significantly higher than the actual loan rate. This is called the assessment rate or serviceability rate.

The standard is to test at the actual interest rate plus a 3% buffer. With current mortgage rates around 6.5%, the assessment rate is approximately 9.5%. Your borrowing power is calculated based on what you can afford at this higher rate — not the actual rate.

Why the 3% buffer? It protects borrowers from payment shock if interest rates rise after they purchase. If rates were to climb 3%, you'd still be able to afford your repayments — which is what the bank is checking.

The 35% income rule

Most lenders limit total debt commitments (mortgage + all other debts) to approximately 35% of gross income at the assessment rate. This is the primary constraint on borrowing power for most Australians with steady employment income.

What reduces your borrowing power

Understanding these factors helps you maximise your borrowing capacity before applying:

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Existing debts

Each $1,000/month in debt payments reduces borrowing power by ~$130,000

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Credit card limits

Lenders count the full credit limit as a commitment (even if unused) — a $10,000 card limit can reduce borrowing by ~$50,000

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HECS/HELP debt

Compulsory repayments are treated as monthly debts — $500/month reduces borrowing by ~$80,000

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Dependants

Each dependent child typically reduces borrowing by $30,000–$60,000 due to higher HEM expense benchmarks

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LMI (LVR > 80%)

LMI premiums add to loan costs and may reduce net borrowing capacity

The HEM expense floor — why your declared expenses may not be used

Australian banks use a minimum living expense benchmark called the Household Expenditure Measure (HEM). If your declared monthly expenses are below this benchmark, the bank uses the HEM figure instead — not your lower declared amount.

This prevents borrowers from understating their expenses to qualify for a larger loan. The HEM scales with income — higher income households are assumed to have higher essential spending.

Under $50k

~$2,200/mo

$50k – $100k

~$2,600–$3,000/mo

$100k – $150k

~$3,600/mo

Over $200k

~$5,000+/mo

This calculator applies an HEM-inspired expense floor to give you a realistic estimate of what lenders will actually assess. For a property-specific assessment including borrowing gap analysis, see HomeVerdict.

Frequently asked questions

Banks calculate your borrowing power by determining the maximum loan amount where your monthly repayments at the assessment rate (market rate + 3% buffer, currently ~9.5%) fit within 35% of your gross income, after deducting existing debt repayments. They also use a minimum living expense benchmark called HEM.

Australian lenders are required to assess your ability to repay at a rate 3% above the loan's actual interest rate. If the current rate is 6.5%, you're tested at 9.5%. This ensures you can still afford repayments if rates rise.

Yes. HECS/HELP repayments are treated as a monthly debt commitment by lenders. If your compulsory repayment is $500/month, this reduces your borrowing power by approximately $80,000–$100,000 depending on your income and loan term.

Key strategies: pay down existing debts, cancel unused credit cards (limits count even if unused), increase your deposit to reduce LMI costs, reduce living expenses, or increase your income with a pay rise or secondary income. A mortgage broker can often find lenders with more favourable assessment criteria.

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