How borrowing power works in Australia

Your borrowing power — also called borrowing capacity — is the maximum amount a bank will lend you for a home loan. It's not just a multiple of your income. Australian lenders run your finances through a detailed serviceability test designed to make sure you can still afford repayments even if rates rise.

What banks look at

Lenders assess your gross income (salary, rental income, bonuses — usually shaded to 80%), subtract your living expenses, existing debts (car loans, credit cards, HECS), and an allowance for dependents. They then apply a serviceability buffer — typically 3% above the loan's actual interest rate — to work out whether you could still pay if rates went up.

The HEM benchmark

Most Australian lenders use the Household Expenditure Measure (HEM), published by the Melbourne Institute, as a floor for living expenses. HEM estimates the minimum a household of your size and income level would spend. If you declare expenses below HEM, the bank still uses HEM. A single person in a metro area might face a HEM of around $1,800–$2,200/month. A couple with two kids could see $3,800+. Declaring realistic expenses is critical — if you under-declare and the bank catches it, your application may be declined.

Serviceability buffer

APRA requires lenders to add a 3% buffer to the loan rate when testing serviceability. If your loan rate is 6.14%, the bank tests whether you could afford repayments at 9.14%. This buffer was reduced from 2.5% to 3% in 2021 and remains in place as of 2026. The higher the buffer rate, the lower your borrowing power — each 1% increase in the assessment rate can reduce your maximum loan by roughly 8–10%.

Tips to improve your borrowing capacity

• Pay down credit cards and personal loans. Even a $10,000 credit card limit reduces borrowing power by ~$30,000 because lenders assess the limit, not the balance.
• Close unused cards. That old card in a drawer is still counted against you.
• Reduce living expenses (real ones — the bank will check statements).
• Apply with a partner to combine incomes, though dependents will increase the expense floor.
• Save a larger deposit. Crossing the 20% threshold avoids Lenders Mortgage Insurance (LMI), which adds thousands to your costs.