Your borrowing capacity is the maximum amount you can afford to borrow for a home loan or investment property loan.

Borrowing capacity considers factors including your income, expenses, liabilities (debts) and assets (things you own). Although these factors may change over time, your borrowing capacity is determined when you apply for a loan. 

If you wish to make any significant changes to your loan, such as increasing the loan amount or refinancing it, your borrowing capacity will need to be determined again to ensure you can afford the proposed changes to the loan.

Several factors are considered when calculating your borrowing capacity.

These factors include, but are not limited to:

To apply for a loan, the bank or lender must first know how much money you receive regularly. In most cases, income will come from your salary (for employees) or business income (in the case of self-employed borrowers).

However, many lenders are willing to consider other sources of income, such as income from shares, compensation payments, Centrelink payments, or rental income, where these provide a regular and stable income.

It’s also important to note that lenders will also factor in the amount of tax you are likely to pay on your income. That is, they will work out how much of your income is left once taxes are considered.

Once your income has been assessed, the lender will then look at your existing liabilities (i.e. how much money you already owe each month) and deduct these from your total income amount.

For example, if you have a car loan, personal loan or HECS debt, your ongoing repayments for these debts will be deducted from your income to work out how much of your income is free to be used towards repayments on your new proposed loan.

It is important to note that your liabilities do not just include the amount you currently owe; They also include the amount you could potentially owe based on your existing credit limits.

For example, you may have a credit card or buy now pay later facility with a $5000 limit but a balance of $0 as you have not accessed the funds. When assessing your borrowing capacity, banks and lenders will base their calculations on the total $5000 limit and not the amount actually owing in case you later access these funds.

Once your income has been assessed and any existing obligations have been deducted, the lender will then look at your living expenses (i.e. how much money you spend each month) and deduct these to check how much is left over each month.

Living expenses are usually assessed by checking your bank statements. They include groceries, retail purchases, travel, recreation, home and vehicle maintenance, communications, subscriptions, insurance, education, childcare costs, clothing, medical, personal care, child or spousal support, and other ongoing commitments.

Lenders will compare your expenditure to a benchmark figure called the Household Expenditure Measure (HEM) to ensure your expenses are not below what would be reasonably expected for someone of your household size and personal situation.

For example, a coupled applicant with dependant children would be expected to have higher living expenses than a single applicant without children.

The type and purpose of the loan usually greatly impact how much you can borrow.

As a general rule, low-cost loans offer a higher borrowing capacity than full-service loans simply because less of your income is eaten up by fees and charges, meaning more can be directed towards paying off the loan.

Most people will also find that their borrowing capacity is higher when they apply for an investment property loan than when they apply for an owner-occupied property. This is because most banks factor in the tax incentives that come with an investment property loan.

Paying less tax frees up more of your income for loan repayments, so banks may be willing to lend more.

Many people also use investment properties to generate income, which can help boost borrowing capacity.

In Australia, the standard loan term is 30 years, with a small handful of lenders offering terms of up to 40 years.

When you apply for a loan, you can choose the term you wish to repay the loan principal – plus any interest and fees – over, up to the maximum term offered by your lender.

If you choose a shorter term, you will pay less interest overall, but your monthly repayments will need to be much higher to pay off the principal amount before the end of the loan term.

Therefore, a shorter term will result in a much lower borrowing capacity than a longer-term loan.

When interest rates increase, borrowing capacity decreases simultaneously.

This is because lenders work out how much you can afford to repay on your loan each month once the above factors have been taken into account and then use this figure to calculate the maximum loan amount you can afford.

Furthermore, banks and lenders do not use the actual interest rate when calculating your borrowing capacity. Instead, they use the current interest rate for the type of loan you are applying for, plus a buffer of an extra 3% to ensure you can comfortably continue to repay the loan if interest rates increase.

Higher interest rates mean higher monthly loan repayments, so banks will be willing to offer you less money overall to avoid running the risk of your monthly payments rising to a level you can no longer afford.

This effectively means that your borrowing capacity will be lower when rates are high and higher when rates are low.

Aiming for a deposit of at least 20% of the value of the property you wish to buy is ideal.

A 20% deposit allows you to avoid extra expenses such as Lenders Mortgage Insurance (LMI). You can view our LMI FAQ for 2023 here.

However, it can still be possible to purchase a property with a deposit of at least 5% plus enough money to cover additional expenses such as stamp duty, legal costs and other moving costs. 

With the exception of a few government schemes that allow a deposit of less than 5%, most lenders will not lend more than 95% of the property’s value, and many prefer to lend much less (often between 80% and 90% maximum).

Therefore, the size of your deposit and the value of the property you buy will affect the total amount a bank is willing to lend you.

For example, if you wish to purchase a property worth $500,000, a bank that lends up to 95% will only lend you a maximum of $475,000 towards that property, even if your maximum borrowing capacity would otherwise be greater than this.

Adjusting any of the abovementioned factors will change your borrowing capacity.

While it would be fantastic to increase your income magically, for most people, it is more realistic to focus on paying down any existing debt and curbing any unnecessary or discretionary spending before applying for a home or investment loan to increase your borrowing capacity.

This is because lower fees and rates will generally lead to a higher borrowing capacity, as more of your income can be directed towards repaying the loan principal (i.e. the original amount you borrowed, excluding fees and accrued interest).

You can also maximise your borrowing capacity by choosing a lender who is a good fit for your needs and income type(s).

For more information, see section 4: “Do all banks and lenders use the same borrowing capacity calculations?” below.

An outstanding HECS debt will reduce your borrowing capacity, like any other type of debt. 

This is because once you reach a certain annual income threshold (currently $48,361 for the 2022/23 financial year), some of your income will need to be directed towards paying off your HECS debt each year at tax time, leaving fewer funds remaining to be used towards repaying a new loan.

HECS debt does not accrue interest in the traditional sense. However, it is indexed yearly to keep pace with the consumer price index (CPI).

In other words, the HECS amount you owe is adjusted each financial year to keep pace with the cost of living changes.

Traditionally, increases in HECS repayment due to indexation have been fairly small. 

However, economists are predicting that HECS indexation rate may climb to over 7% this year. This means that HECS debt will become more costly, which will, in turn, further negatively impact your borrowing capacity.

Your finance broker will be able to provide a range of borrowing capacity calculations to show you the impact of keeping your HECS debt vs paying it off to help you maximise your borrowing capacity.

Buy Now Pay Later facilities such as Afterpay, Humm, Latitude, Klarna and Paypal Pay in 4, can also impact your borrowing capacity.

If you have been approved for one of these facilities, most lenders will treat it similarly to a credit card. This means they will consider your total approved limit as an outstanding debt, even if you have not used all or any available funds.

If you have less than a 20% deposit, in most cases, you will be required to pay Lenders Mortgage Insurance or LMI (although there are some exceptions to this rule – see https://www.nbshomeloans.com.au/10-things-you-should-know-about-mortgage-lenders-insurance-lmi/ for more information).

LMI is a type of insurance that protects the lender – not you as the borrower – against the risk that you cannot make your repayments and the property needs to be sold for an amount less than the amount you owe.

Paying LMI does not increase your borrowing capacity.

In fact, if you choose to capitalise LMI – that is, add the LMI costs to the amount you borrow so you don’t need to come up with a single lump-sum payment upfront – your borrowing capacity will decrease as some of your income must be redirected away from paying off the loan principal.

More of your income will go towards paying off the LMI premium portion and the extra interest it accrues.

All banks and lenders use different borrowing capacity calculations. For this reason, there can be a huge variance between what two different lenders may be willing to lend you.

One of the main reasons is that different lenders treat different sorts of income differently.

For example, some lenders may be willing to accept Centrelink or compensation income, while others will not allow this at all.

An experienced mortgage broker can help you navigate the most suitable lenders in this situation.

Some lenders may accept casual income, commission or second job income. In contrast, others either do not allow it or only accept a portion of it (e.g. they may accept 80% of these income types instead of the full amount you actually receive).

However, even if you receive a standard PAYG salary with no other income types to factor in, there is still likely to be a wide variance in the maximum amount different lenders will be willing to lend to you.

For someone with average expenses, no debt, and an annual PAYG salary of $100,000, there can be a range of up to $200,000 difference in borrowing capacity between the most and least generous lenders. Each lender has different interest rates, fees and charges, policies, and risk appetite. Some banks and lenders are simply more conservative than others.

There are numerous borrowing capacity calculators online, including our NBS Home Loans ‘Borrowing Power’ calculator.

However, this huge variance in capacity, and the different ways lenders assess different income types, are one reason why online borrowing capacity calculators should be used as a rough guide only and cannot be relied on.

Unfortunately, there is no one ‘right’ answer to this question. This is because income is only one factor in determining your borrowing capacity.

Your existing debts, expenses, income types, personal situation, and many other factors all influence the total amount the bank is willing to offer you.

Let’s assume you are a single person with no children, have average expenses, earn exactly $100,000 per year as a PAYG employee, have no other debt, and are looking at a 30-year loan term for an owner-occupied property.

Based on today’s figures, borrowing around 4.5 to 5.5 times your total income may be possible. Most lenders will allow you to borrow between $450,000 and $550,000 (with some outliers at either end of the range).

However, it’s very unlikely that this is exactly your situation.

It is important to note that while no ‘one size fits all’ rule applies when determining how much you can borrow, many lenders DO have a maximum cap on the total ratio of debt to income (DTI) they will accept.

Many lenders require that your total amount of debt (including the new loan you are applying for, plus any existing debt) is less than 6 times your annual income. A small number of lenders consider higher DTI ratios in certain circumstances. 

However, it is important to realise you may not automatically be able to borrow to the maximum DTI cap, and this should not be used as a guide to how much you can borrow. It is only one factor that will be taken into account.

Any credit facilities you currently hold (or have recently closed) will likely show on your credit report. Any existing debt or credit facilities like credit cards – even if you currently owe nothing on them – will reduce your borrowing capacity for a new home or investment loan.

If you have adverse credit behaviours noted on your credit report or a low credit score due to previous actions, will this affect your borrowing capacity?

Unfortunately, having a low credit score or poor credit history can affect your ability to be approved for a loan regardless of the amount you wish to borrow, as many lenders will consider it risky to lend any further money to you.

However, a small handful of lenders will consider borrowers with a low credit score or poor credit history, especially where there is a good explanation and consistent recent improvements in credit beahviour. 

It’s important to remember that your options may be limited, so shopping around for a lender with a more generous borrowing capacity may not always be possible, depending on your personal situation.

For more information on “Understanding Your Credit Score”, visit our article at:

When you apply for a loan, lenders will ask that you declare your assets as part of your application. This helps them determine if you have genuine savings and the ability to save up or acquire important items over a period of time.

Having assets that can be sold off if necessary can also give them confidence in your ability to repay the loan. This becomes particularly important if the loan term extends beyond your expected retirement age. Lenders will want to know how you intend to repay the loan once your regular income stops.

However, your assets do not generally form part of your borrowing capacity unless you are drawing an income from them or they are costing you money.

For example, if you own shares, the value of the shares will generally not increase your borrowing capacity. Still, any income you derive from the shares may be considered part of your total income when calculating your borrowing capacity. Likewise, a vehicle you own outright will not increase your borrowing capacity, but any running costs will, be factored into your expenses.

In general, lenders are more concerned with the cash flow you have available to make repayments rather than the value of the assets you own.

Many people want to know if they can borrow against the value of their assets without any income, particularly if they have a lot of equity in their home or investment property.

Equity is defined as the value of your property, less any money you owe on it.

Except in very rare circumstances (such as reverse mortgages and some specific types of loans for business purposes), it is impossible to borrow without demonstrating that your income is sufficient to ‘service’ the loan (i.e. meet your repayment obligations). 

Under responsible lending guidelines, all Australian financial institutions must ensure you have sufficient income to meet your home or investment loan repayments.

This means it is no longer possible to buy or refinance a home or investment property based solely on the property’s equity or the value of your assets.

If you have questions about your borrowing capacity or whether you qualify for a home or investment property loan, NBS Home Loans is here to help.

We will take the time to understand your individual needs and situation and provide you with the calculations you need to start your property search in earnest.

With hundreds of loans from over 40 lenders, we can also help you compare your borrowing capacity across a range of lenders and match you to those who are a good fit for your individual situation.

NBS Home Loans has written a helpful article for Australians on the 5 Signs That Tell You It’s Time To Review Your Home Loans in 2023: 5 SIGNS THAT TELL YOU IT’S TIME TO REVIEW YOUR HOME LOAN IN 2023

For an up-to-date overview of the current rates on offer, visit our Facebook page at facebook.com/NBSHomeLoans

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