How Cost of Living Pressures Affect Your Borrowing Capacity

Rising living costs directly reduce how much you can borrow. Here is how lenders assess expenses and what you can do to maximise your borrowing capacity.

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By Steve Chin · April 2026 · 6 min read

The expense squeeze

Groceries, insurance, childcare, energy, fuel — the cost of everything has risen sharply. This is not just a household budget problem. It is a borrowing capacity problem. Every dollar more you spend on living costs is a dollar less the bank believes you can put toward loan repayments.

Lenders are required to verify your actual living expenses — usually by reviewing 3 months of bank and credit card statements. If your spending has increased (and for most Australians it has), your maximum borrowing amount has decreased even if your income has not changed.

How the assessment actually works

Lenders take the higher of two figures: your declared living expenses or the Household Expenditure Measure (HEM) benchmark for your household type. HEM is a statistical benchmark based on ABS data — it represents the median spending for a household of your size and income level.

The catch: HEM has been updated to reflect higher costs, and many lenders now use enhanced expense verification that categorises every transaction in your bank statements. Buy-now-pay-later accounts, subscription services, and regular dining-out transactions are all flagged and counted.

Practical steps to protect your borrowing capacity

1.Close unused buy-now-pay-later accounts — even with a zero balance, open BNPL accounts reduce your capacity at many lenders
2.Reduce credit card limits — lenders assess the limit, not the balance. A $10,000 credit card limit reduces your borrowing capacity by approximately $30,000–$40,000 regardless of whether you use it
3.Clean up discretionary spending — in the 3 months before applying, reduce visible discretionary transactions. This is not about living on rice — it is about removing the transactions that lenders flag as non-essential
4.Choose the right lender — this is the most impactful step. Lender expense assessment varies significantly. Lendology identifies which lenders will assess your specific expense profile most favourably

The difference between lenders can be $50,000–$100,000 in borrowing capacity for the same income. Book a free chat and we will show you exactly where you stand across our full panel.

Frequently asked questions

How do lenders assess my living expenses?

Lenders use the higher of your declared expenses or the Household Expenditure Measure (HEM) benchmark. HEM is based on ABS data and varies by household size and income. If your actual spending exceeds HEM — which is increasingly common with rising costs — the lender uses your higher figure, directly reducing your borrowing capacity.

Can I reduce my expenses to borrow more?

Yes, but it needs to be genuine and sustainable. Lenders look at 3 months of bank statements. Reducing discretionary spending — subscriptions, dining out, buy-now-pay-later balances — in the months before applying can measurably increase your capacity. Lendology identifies the specific expenses that impact your assessment most.

Do different lenders assess expenses differently?

Significantly. Some lenders use stricter expense benchmarks, while others are more flexible in how they categorise spending. The difference in borrowing capacity between lenders can be $50,000–$100,000 for the same income and expenses. This is where a broker adds genuine value — we know which lenders will assess your situation most favourably.