Borrowing Power: How Lenders Work Out What You Can Borrow

Borrowing power is the most a lender is likely to lend you, based on what you earn, what you spend and what you already owe. It's usually less than people expect, and the main reason is a rule most borrowers never hear about. This guide explains how the assessment works, using APRA and Moneysmart material we read on 29 October 2026.

HomeLoansCalculator.au is a general information site run by Dominet BV. This page is general information only and is not financial advice. It does not consider your objectives, financial situation or needs. We are not a lender or a mortgage broker and we don't recommend any loan. Check with a licensed professional or the lender before you act. Figures were checked on 29 October 2026. Read our general information notice. Our borrowing power examples are simplified. Each lender uses its own model, and only a lender can tell you what it will lend.

The short version

A lender takes your income, takes away your living costs and other debt repayments, and looks at what's left. It then asks whether that leftover amount could cover the repayments on the new loan at a rate well above the one you'd actually pay. The largest loan that passes that test is, roughly, your borrowing power.

Moneysmart lists the things that shape it: your income and financial commitments, your deposit and other savings, and your credit score and credit report. Lenders also look at your employment and savings history.

The serviceability buffer

Banks and other authorised deposit-taking institutions (ADIs) must check that you could still meet repayments at an interest rate at least 3 percentage points above the loan's product rate. APRA confirmed on 28 May 2026 that the buffer stays at 3 percentage points. In its April 2026 submission to a Senate committee, APRA describes this as a contingency for shocks over the life of the loan, whether from higher rates, lower income or higher expenses.

So if a loan's rate is 6.5%, a bank tests your budget as if the rate were at least 9.5%. Some lenders also use their own minimum assessment rate.

The buffer is set by APRA for the institutions it regulates. Lenders outside that group still have responsible lending duties under credit law, so they also have to assess whether a loan suits you.

How income is counted

Not every dollar counts the same. APRA's submission notes that its practice guide for mortgage lending (APG 223) says a prudent lender would discount less stable income, such as bonuses or overtime, by at least 20%.

Example 1 (example figures). Sam earns a base salary of $100,000 and averaged $20,000 a year in overtime. If a lender discounts overtime by 20%, it counts $16,000 of the overtime. Sam's assessed income is $116,000, not $120,000. Lenders vary in how they treat each income type, and some count more or less than this.

Rental income, self-employed income and government payments each have their own rules at each lender.

How expenses are counted

APRA's submission says lenders must collect reasonable estimates of your expenses and that expense benchmarks must not replace proper enquiries. In plain terms, you'll be asked what you spend, the lender will check it against your statements, and it may also compare it with a benchmark for a household like yours.

Things that usually reduce borrowing power:

• credit card limits, even if you pay the card off each month
• car loans, personal loans and buy now pay later accounts
• HECS-HELP or other study debt repayments
• child care, school fees and child support
• a high regular spend on things that are easy to cut but haven't been cut yet

Closing an unused credit card can lift your borrowing power because lenders tend to count the limit, not just the balance.

Debt-to-income limits

Since 1 February 2026, APRA has allowed banks to write no more than 20% of their new owner-occupier loans, and separately 20% of new investor loans, at a debt-to-income (DTI) ratio of six times or more. That's a limit on each bank's lending as a whole, not a cap on any single borrower. APRA said on 28 May 2026 that this limit remains unchanged and wasn't restricting overall lending at that time.

Example 2 (example figures). A couple earning $150,000 a year between them would hit a DTI of six with total debts of $900,000. Total debts include the new loan and any other debts they hold. Above that level, a bank can still lend, but those loans count toward its 20% share.

Worked examples: what the buffer does

These examples ignore fees and use a 30 year term with monthly repayments. The rates are example rates, not market rates.

Example 3: the same loan at two rates

• Loan: $600,000
• Actual rate: 6.5%, so the repayment is $3,792.41 a month
• Buffered test rate: 9.5%, so the assessed repayment is $5,045.13 a month

The lender wants to see that your budget can carry about $1,253 a month more than you'd actually pay.

Example 4: working backwards from spare income

Say a lender works out that, after tax, living costs and other debts, you have $4,000 a month left over.

In both rows the buffer cuts the result by roughly a quarter. That's the gap between what a simple repayment calculator suggests you can afford and what a bank is likely to approve.

Our borrowing power calculator runs this test with the buffer switched on by default. You can turn it off to see the difference, but the buffered figure is the one closer to a bank's view.

The deposit side of the picture

Borrowing power is only half of your budget. The other half is your deposit, after costs. Moneysmart suggests working it out like this: start with the property price, add the buying costs, subtract what you can borrow, and what's left is the deposit you need.

Example 5 (example figures). You're looking at a $750,000 home. Buying costs (stamp duty, legal and inspection fees) come to $35,000. You can borrow $600,000. You need $750,000 + $35,000 − $600,000 = $185,000 of your own money. If you can borrow only $475,000, the gap grows to $310,000.

Your loan-to-value ratio (LVR) also matters. Moneysmart's example is a $450,000 loan on a $600,000 home, which is an LVR of 75%. Above 80%, you may have to pay lenders mortgage insurance, which adds to your costs. Government schemes may let some buyers borrow up to 95% without LMI. See first home buyer schemes by state.

Pre-approval

Moneysmart says pre-approval usually lasts 3 to 6 months and shows roughly how much you may be able to borrow. It doesn't commit you to the loan, and it doesn't mean you'll get final approval. The lender will still assess your circumstances and the property before it signs off.

What this means for you

• A repayment you can afford today isn't the same as a loan a bank will approve. The 3 point buffer explains most of the gap.
• Pay down or close debts you don't need, especially unused credit card limits, before you apply.
• Be honest and complete about expenses. Lenders check statements, and a mismatch slows things down.
• Work out your deposit after buying costs, not before. Stamp duty alone can be tens of thousands of dollars (see our stamp duty by state guide).
• The amount a lender will lend isn't always an amount you'll feel comfortable with. Moneysmart makes the same point. Use the repayments guide to test the monthly cost.

Frequently asked questions

What is the serviceability buffer?

It's an extra margin lenders add to the interest rate when they test whether you can afford a loan. APRA requires banks and other ADIs to use a rate at least 3 percentage points above the loan rate. APRA confirmed the 3 point setting on 28 May 2026.

Why is my borrowing power lower than a repayment calculator suggests?

Because the lender tests your budget at the higher, buffered rate, counts only part of some income, and uses your real expenses and debts. In our example, the buffer alone reduced the supported loan by roughly a quarter.

Does a credit card I never use affect how much I can borrow?

Usually yes. Lenders tend to count the card's limit as a possible debt, even if the balance is zero. Reducing the limit or closing the card can help. Ask the lender how it treats card limits.

Is there a maximum debt-to-income ratio for each borrower?

Not as a single rule for each person. APRA's limit, in place since 1 February 2026, caps the share of a bank's new lending at a DTI of six or more at 20%. Individual lenders may have their own policies on top.

Is pre-approval a promise to lend?

No. Moneysmart notes that pre-approval doesn't guarantee you'll get the loan. The lender still assesses you and the property before final approval.

Do non-bank lenders use the same buffer?

APRA's buffer applies to banks and other ADIs that it regulates. Non-bank lenders still have responsible lending duties under credit law, but they may assess serviceability differently. Ask any lender what rate it tests you at.