Borrowing Power — What Banks Actually Look At

The Serviceability Calculation

Banks follow a formula to determine the maximum loan they'll approve:

• Gross income — all sources: salary, rental income (at 80%), bonuses (usually 50%), investment income
• Minus living expenses — whichever is higher: your declared expenses or the HEM benchmark (see below)
• Minus existing debt commitments — car loans, HECS, credit card limits (at 3.8%/month regardless of actual balance), personal loans
• Equals net income available for mortgage servicing
• Divide by a buffer rate — your actual rate plus an APRA-mandated serviceability buffer (currently 3%). The resulting monthly repayment must be affordable.

The HEM Benchmark

HEM (Household Expenditure Measure) is a benchmark for living expenses used by most Australian lenders, developed by Melbourne Institute. It represents "modest" spending — below what most Australians actually spend in higher-income categories. Banks use whichever is higher: your declared expenses or the HEM for your household type.

HEM varies by location and household composition. A single person in Melbourne might have a HEM of $2,100/month; a family of four in Sydney might be $4,800/month. If you declare $3,500/month expenses but your family HEM is $4,800, the bank uses $4,800. You can't strategically under-declare expenses.

What Kills Borrowing Capacity

• Credit card limits, not balances. A $20,000 credit card limit reduces your assessed borrowing capacity by roughly $70,000–$90,000 — even if the balance is $0. Banks assume you could draw the full limit tomorrow. Cancel unused cards before applying.
• Buy now, pay later accounts. BNPL facilities (Afterpay, Zip) are now visible to lenders and treated as short-term debt. Close these before applying.
• Car loans and personal loans. Each $1 of monthly repayment reduces your assessed capacity by roughly $6 in borrowing.
• HECS/HELP debt. HECS repayments are treated as a committed expense. A $50k HECS debt reduces your net income by your repayment rate — at $80k income, roughly $4,000/year (5% threshold rate), reducing borrowing capacity by ~$60,000.
• Existing investment loans. Rental income on existing properties counts against you — the bank assesses it at 80% and the debt at full repayments at the buffer rate.

How to Legitimately Maximise Borrowing Power

• Add a co-borrower. A second income approximately doubles assessed capacity (minus the second person's existing debts). Even a part-time income on the application helps.
• Show full income. Include all genuine income sources — salary, dividends, rental income, government benefits, bonus history. Lenders weight these differently but all count.
• Reduce liabilities before applying. Cancel credit cards above your needed limit. Pay out personal loans if you have cash available.
• Choose the right lender. HEM benchmarks and expense assumptions vary between lenders. A mortgage broker can identify lenders with more favourable assessments for your profile.
• Salary sacrifice into super (carefully). This reduces your gross income, which reduces HEM and also reduces assessed capacity — usually a bad idea just before a home loan application.