The Easiest Way to Understand Your Borrowing Capacity

Your borrowing capacity is the maximum amount a lender will approve based on your income, expenses, debts, and the serviceability buffer they apply.

Lenders across Australia assess your borrowing capacity by comparing your income to your regular expenses and existing commitments, then applying a serviceability buffer of 3.0 percentage points above the actual loan interest rate. That buffer means you're assessed as though the rate is higher than what you'll actually pay, which reduces the loan amount you can service. The idea is to leave room for rate rises without putting you under financial pressure. For clients based in WA, this calculation happens the same way whether you're looking at property in Perth, the South West, or anywhere else, but the property price caps under schemes like the Australian Government 5% Deposit Scheme do vary by location.

Understanding your borrowing capacity before you start shopping for property means you know what price range to focus on, and it also means you can make decisions that improve your capacity if needed.

How Lenders Calculate What You Can Borrow

Lenders start with your gross income and subtract your regular expenses, existing debts, and a notional amount for living costs based on the Household Expenditure Measure or a similar benchmark. They then apply the 3.0 percentage point serviceability buffer to the interest rate on the loan you're applying for. If you're applying for a variable rate loan at 6.2%, the lender assesses whether you can service repayments at 9.2%. The loan amount that fits within that higher repayment threshold becomes your maximum borrowing capacity.

Consider a couple earning a combined gross income of $140,000 per year with a car loan repayment of $450 per month, no other debts, and modest living expenses. At current variable rates, their borrowing capacity might sit somewhere between $550,000 and $650,000 depending on the lender's living cost assumptions and the loan structure they choose. A home loan with an offset account doesn't change the capacity calculation directly, but it does show lenders you're managing cash flow, which can sometimes support a stronger application.

Why Your Expenses Matter More Than You Think

Every ongoing commitment you have reduces the income available to service a home loan. Lenders include car loans, personal loans, credit card limits (not just the balance), buy-now-pay-later accounts, and even HECS-HELP debts in their calculations. A credit card with a $10,000 limit might reduce your borrowing capacity by $30,000 to $40,000, even if you pay it off in full each month, because lenders assume you could draw that limit at any time.

In our experience, clients are often surprised to learn that reducing or closing unused credit facilities before applying can lift their borrowing capacity by tens of thousands of dollars. That doesn't mean cancelling cards you actively use for points or convenience, but it does mean being intentional about what you keep open while you're applying for finance.

Income Types That Strengthen Your Application

Lenders treat different income types differently. Base salary is the most straightforward and is typically accepted at 100% of the amount shown on your payslip or tax return. Overtime, bonuses, and commission are often accepted at a percentage, usually between 50% and 100%, depending on how long you've been receiving them and whether they're consistent. Rental income from an investment property you already own is usually accepted at 80% of the gross rent to allow for vacancy and maintenance costs.

Self-employed income is assessed on the average of your last two years of tax returns in most cases, though some lenders will accept a single year if your income is stable or increasing. If you've recently started a business, lenders generally want to see at least 12 months of trading history, and some will ask for two full financial years. The income that counts is your taxable income after deductions, which can reduce your borrowing capacity compared to someone earning the same amount as a salary.

As an example, a self-employed borrower showing $90,000 of taxable income after deductions may have lower borrowing capacity than a PAYG employee earning $90,000 gross, even though their actual cash flow might be similar or higher. That's one reason it's worth discussing your situation with a broker who works with lenders that understand how self-employed income works in practice.

Debt-to-Income Limits and How They Affect You

From 1 February 2026, lenders can only write up to 20% of their new owner-occupier loans and 20% of their new investor loans to borrowers with a total debt-to-income ratio of six times or more. That means if your total borrowing (including the new loan) is six times your gross annual income or higher, you fall into a portion of the lender's portfolio that's now capped.

For a household earning $120,000 per year, a total debt level of $720,000 or more would trigger the six-times threshold. If you're applying for a loan that pushes you over that line, some lenders may decline the application or ask you to reduce the loan amount, while others may still approve it if they haven't reached their 20% cap for that quarter. The outcome can depend as much on timing and lender capacity as it does on your financial position, which is one reason working with a broker who tracks lender appetite can make a tangible difference to your outcome.

Property Type and Loan Structure Impact on Capacity

The type of property you're buying and the loan structure you choose both affect how much you can borrow. A unit in a block with more than 50% non-owner-occupier residents, or a property in a regional or remote area, may attract a higher risk weighting from some lenders, which can reduce your maximum loan amount. A loan structured as interest-only will often result in lower borrowing capacity than a principal-and-interest loan, because the repayment during the interest-only period is lower and lenders apply the buffer to that lower figure.

A split loan, where part of your borrowing is on a fixed rate and part on a variable rate, is assessed using the buffer on each portion separately, so it doesn't usually change your capacity compared to a fully variable or fully fixed loan. If you're looking at construction loans, lenders assess your capacity based on the total loan amount and the expected end value of the property, not just the land cost, so it's worth confirming your borrowing capacity before you commit to a builder or design.

Improving Your Borrowing Capacity Before You Apply

If your borrowing capacity sits below the amount you need, there are a few levers you can pull before you apply. Paying down or closing existing debts, particularly credit cards and personal loans, is the most direct way to lift your capacity. Increasing your income, either through a pay rise, taking on additional hours, or adding a co-borrower, also helps, though lenders will want to see that the income is stable and ongoing.

Switching from a single applicant to joint applicants can sometimes double your borrowing capacity, but it also means both parties are equally responsible for the debt. If you're planning to apply jointly, make sure both credit files are in order and that any debts or defaults are disclosed upfront.

Some buyers also look at whether salary sacrificing into super or making voluntary deductions is reducing their assessable income unnecessarily during the application period. While those contributions make sense for long-term wealth building, pausing them for a few months before you apply can sometimes improve your short-term borrowing position. That's a conversation worth having with both your broker and your accountant.

Pre-Approval Gives You a Borrowing Limit You Can Work With

Getting home loan pre-approval means a lender has assessed your income, expenses, and debts, applied the serviceability buffer, and confirmed in writing the maximum amount they'll lend you. That approval is usually conditional on the property meeting the lender's criteria and your financial position staying the same, but it gives you a firm figure to work with when you're looking at properties or making offers.

Pre-approval typically lasts three to six months depending on the lender, and it can be extended if your settlement date is pushed back. It's not a guarantee that the loan will settle, but it does mean you've cleared the income and serviceability assessment, which is the part of the process that trips up most buyers. For buyers using the Australian Government 5% Deposit Scheme, confirming your borrowing capacity through pre-approval also helps you understand whether the property price caps in your area align with what you can actually borrow, which in WA is $850,000 in Perth and metro postcodes and $600,000 in other areas.

Call one of our team or book an appointment at a time that works for you. We'll walk through your income, commitments, and the loan structures that make sense for your situation, and give you a borrowing capacity figure you can rely on.

Frequently Asked Questions