Lenders do not simply multiply your income by a fixed number. They run a serviceability assessment that compares your income against your committed expenses and tests whether you could afford repayments at a higher rate - currently around 3% above the loan rate. This is the buffer APRA requires lenders to apply.
Income is assessed based on employment type. PAYG salary is typically taken at 100%. Overtime, commission, rental income, and self-employed income are often assessed at a reduced percentage depending on the lender's policy.
On the expense side, lenders use either your declared living expenses or the Household Expenditure Measure (HEM) - a benchmark figure based on your location, income, and number of dependants - whichever is higher. If your actual expenses are higher than HEM, your stated expenses will apply.
Every liability on your credit file reduces your borrowing capacity. The most common culprits are credit card limits, car loans, personal loans, HECS-HELP debt, and buy now pay later accounts.
Credit card limits are assessed at the full limit - not your current balance. A $20,000 credit card limit can reduce your borrowing capacity by $80,000 to $100,000 depending on the lender. Closing unused cards before applying is one of the most effective ways to improve your borrowing power.
The number of dependants also affects the result. Each additional child increases the lender's estimate of your living expenses, which reduces the income available to service a loan.
Every lender uses its own serviceability model. The differences include the stress test rate they apply, the HEM benchmarks they use, how they treat income types like overtime or rental income, and how they assess liabilities. The gap between the most and least generous lender can be $100,000 or more on the same application.
This is one of the most practical reasons to use a broker. A broker who works across 60 lenders knows which ones apply the most favourable policies for your income type and situation.
A broker compares your application across multiple lenders simultaneously and identifies which will give you the best outcome. They also advise on steps you can take before applying - like closing unused credit cards, consolidating debts, or restructuring income documentation - that can meaningfully increase your borrowing power.
Knowing your real borrowing capacity before you make an offer on a property is also critical. Pre-approval with the right lender means you are not just estimating - you have a genuine figure to work with.
Jason and Steve are Adelaide mortgage brokers who give honest, practical advice at no cost to you. We run the numbers across 60+ lenders and tell you what you can realistically borrow.
The information on this page is general in nature and does not constitute financial advice. Given Finance Pty Ltd (t/a Lendology) ACN 624 144 501 is authorised under LMG Broker Services Pty Ltd ACL 517192.