How Lenders Work Out What You Can Borrow
Before a lender says yes, they want to be sure you can comfortably afford the repayments. Not just today, but if rates rise further. That test is called serviceability, and it decides how much you can borrow and which lenders will have you.
This page covers the second C of credit: Capacity. Lenders are asking: is there enough cash to pay? Read the full guide to the 4Cs.
The simple version
Lenders take your income, subtract your living costs and your other debt repayments, and see what’s left over. Then they check that what’s left covers the new loan’s repayments, tested at a higher rate than you’ll actually pay. Banks use a buffer of 3% above your actual rate. Many non-bank lenders use 2%, and some go lower for like-for-like refinances.
What counts as income
Lenders don’t treat every dollar the same.
| Income type | How lenders usually treat it |
|---|---|
| Full-time or part-time base salary | Usually counted in full, once you’re past any probation |
| Overtime, bonuses and commission | Often counted in part, and usually need a history |
| Casual income | Usually needs some time in the job; policies vary a lot between lenders |
| Self-employed income | Usually needs one to two years of tax returns |
| Rental income | Usually counted in part, to allow for vacancies and costs |
| Government payments | Some count, some don’t, depending on the payment and the lender |
What counts against you
- Living expenses. Lenders use what you tell them or a standard benchmark, whichever is higher.
- Credit card limits. Lenders count a repayment on the full limit, even if you owe nothing. A $15,000 limit can cut your borrowing power by tens of thousands of dollars.
- Car loans and personal loans. Every monthly repayment reduces what’s left over.
- Buy now pay later accounts. These can now show on your credit file and may be counted.
- HECS-HELP debt. Repayments usually count, though some lenders treat it more flexibly if you’re close to paying it off.
- Dependants. Each child adds to your assessed living costs.
Five ways to boost your borrowing power
- Cut or close credit card limits you don’t need. This is often the quickest win.
- Pay off small debts, like a car loan with a few months left.
- Track your spending for three months before you apply. Lenders look at your bank statements.
- Have your income paperwork ready. Recent payslips, your latest tax return or income statement, and for self-employed, your accountant’s details.
- Choose the right lender. Each lender’s calculator is different. The same borrower can get very different answers from different lenders.
Want a quick estimate first? Try our home loan calculators.
Help us help you
A few small things make the process faster and smoother:
- Let your payroll team know a lender may call to confirm your job
- Keep your payslips as downloaded PDFs, not screenshots
- If your employer’s trading name differs from its company name, have both handy
- If you work for a small business, be ready to provide your tax notices
Capacity and refinancing
The same test applies when you refinance. After several rate rises, some people who comfortably pay their current loan find it harder to pass a new lender’s test. If that’s you, don’t assume you’re stuck. Some lenders have policies for like-for-like refinances. Read more about refinancing when rates rise.
In our Credit Ready Check, Capacity is the “able to repay” side of the four-box grid. Together with your credit history, it decides whether you’re Strong, Likely, Vulnerable or Weak.
FAQs
Why do different lenders give me different borrowing amounts?
Each lender uses its own calculator, expense benchmarks and rules on income. That’s why comparing lenders matters.
Do credit card limits really affect how much I can borrow?
Yes. Lenders assume you could use the full limit, so they count a repayment on it even if your balance is zero.
Can I borrow more if my partner applies with me?
Often, yes, because their income counts too. But their debts and expenses count as well.
Does a bigger deposit increase my borrowing power?
A bigger deposit doesn’t change your serviceability, but it lowers your LVR. That can open up more lenders and sharper rates. Read how equity and LVR affect your rate.
Albert Waldron is a Credit Representative (407514) of Australian Finance Group Ltd, Australian Credit Licence 389087. This is general information only and does not take into account your personal circumstances. Please seek advice before acting. Credit Ready Check is a free lending review, not a credit repair service.