In short: Borrowing power is the maximum loan a lender will approve based on your income, expenses, debts and the APRA buffer of your rate plus 3 percentage points. You can lift it quickly by cancelling or reducing credit card limits, paying out small loans, trimming three months of discretionary spending, documenting all income, and choosing a lender whose policy suits your situation.
Two people on the same salary can be approved for loans that differ by $100,000 or more. The gap comes from liabilities, living expenses and lender policy, and all three can be changed. This guide works through each lever in order of impact, with figures based on a typical buyer looking in Melbourne's north, so you can see what a $5,000 credit card or a $400-a-month car loan really costs you in borrowing capacity.
How lenders calculate borrowing power
Every lender runs the same basic equation: income minus tax, minus living expenses, minus existing debt commitments, equals the surplus available for a mortgage. That surplus is then tested against repayments at an assessment rate, not the actual rate.
| Step | What the lender does |
|---|---|
| 1. Gross income | Salary, plus shaded overtime, bonus, commission and rental income |
| 2. Net income | Tax and Medicare levy deducted (HECS/HELP repayments deducted too) |
| 3. Living expenses | The higher of your declared expenses or the HEM benchmark for your household |
| 4. Existing commitments | Credit card limits, loans, BNPL, child support |
| 5. Surplus | What is left each month for a mortgage |
| 6. Assessment rate | Actual rate + 3 percentage points (APRA buffer) |
| 7. Maximum loan | The loan whose repayment at the assessment rate fits the surplus |
For illustration, a $600,000 loan at 6.00% p.a. costs around $3,597 a month, but the lender checks whether you could pay about $4,828 a month at 9.00%. That buffer is why borrowing power feels lower than the repayments you know you can afford. Run your own figures through the borrowing power calculator before reading on, so you have a baseline.
Lever 1: cut credit card limits
Lenders assess credit cards on the limit, not the balance, because you could max the card out the day after settlement. Most assume a monthly commitment of around 3–4% of the total limit. A $10,000 limit you never use is treated as a $300–$400 monthly debt, which at the assessment rate knocks roughly $35,000–$45,000 off your maximum loan.
| Total credit card limits | Assumed monthly commitment | Approximate borrowing power lost |
|---|---|---|
| $5,000 | $150–$200 | $18,000–$25,000 |
| $10,000 | $300–$400 | $35,000–$45,000 |
| $20,000 | $600–$800 | $70,000–$90,000 |
The fix is simple: cancel cards you do not need and reduce the limits on those you keep, then get written confirmation from the card issuer before applying. If a card has a balance you cannot clear, ask your broker whether consolidating it into the home loan or paying it out from savings gives the better result.
Lever 2: pay out small loans and BNPL
A car loan at $450 a month reduces borrowing power by roughly $50,000. A $15,000 personal loan does similar damage. If a loan has less than 12 months to run, or a payout figure you can cover from savings without cutting your deposit below what you need, paying it out before you apply usually adds far more to your borrowing power than it takes from your deposit.
Buy-now-pay-later accounts are treated inconsistently. Some lenders ignore a closed account with no balance; others count any active facility as a liability. Close them, wait for the closure confirmation, and keep it with your application.
Where you have several debts, a debt consolidation into the new home loan can work, but only if the lender accepts it at your LVR. Model it with the debt consolidation calculator.
Lever 3: clean up three months of statements
Lenders compare your declared living expenses with three months of bank statements and use whichever is higher. Regular gambling transactions, frequent BNPL, overdrawn accounts and multiple small loans are read as risk, not just as expenses. For the three months before you apply:
- Cancel unused subscriptions and memberships.
- Avoid cash withdrawals that you cannot explain.
- Keep every account in credit.
- Move savings into one account so the deposit history is easy to verify (see genuine savings explained).
- Do not open any new credit facility.
You do not need to live on rice for a quarter. You need statements that match a sensible expense declaration and show you can manage money.
Lever 4: document every dollar of income
Income that is not on a payslip is often left off applications entirely. Check whether you can include:
- Overtime and shift allowances. Usually accepted at 80–100% with a 6–12 month history, especially for nurses, police and emergency services.
- Bonuses and commission. Typically averaged over two years and shaded to 80%.
- Casual or second-job income. Needs 6–12 months of consistent history, depending on the lender.
- Rental income. From an existing investment property, counted at 75–80% of the gross rent.
- Government payments. Family Tax Benefit A and B are accepted by many lenders where children are under a certain age.
- Salary sacrifice. Some lenders add pre-tax sacrificed amounts back to income.
Self-employed buyers have a separate set of options, including one-year financials with some lenders and add-backs for depreciation and one-off expenses. See the self-employed home loan guide.
Lever 5: choose the lender for your profile
This is where a broker changes the outcome. Lenders differ on HEM assumptions, how they treat HECS, what percentage of bonus income they accept, how they assess casual work and whether they count a partner's income if only one person is on the loan. Across a panel of lenders, the same couple can see borrowing power vary by $60,000–$120,000 purely on policy.
Examples of policy differences that matter in Melbourne's north:
- Lenders that accept 100% of overtime for essential workers.
- Lenders that assess HECS at the actual repayment rate rather than a flat percentage.
- Lenders that accept rental income from a granny flat or dual-occupancy build in Wollert or Kalkallo.
- Lenders that accept a 12-month casual history instead of 24 months.
Lever 6: structural options
If the levers above are not enough, consider:
- A longer loan term. Thirty years is standard; a few lenders offer 35 or 40 to younger borrowers. Repayments fall, borrowing power rises, but total interest rises too.
- A joint application. Adding a partner's income can lift the ceiling substantially, but both become fully liable. Read buying property with a partner.
- A guarantor. A family guarantee does not increase serviceability, but it removes LMI and lets you borrow at 100% of price plus costs. See buying with a guarantor.
- A bigger deposit. Not a serviceability lever, but a smaller loan means a lower LVR, cheaper rate and no LMI, which improves the surplus.
- Help to Buy. The government's equity share reduces the loan you need to service. See the Help to Buy guide.
Worked example: adding $95,000 to a Sunbury budget
Amit and Sita earn $92,000 and $68,000. They have two credit cards with combined limits of $18,000, a car loan at $520 a month with 14 months left ($6,800 payout), Sita has a HECS balance, and they have $85,000 in savings. They want a house-and-land package in Sunbury.
| Action | Change to borrowing power (approx.) |
|---|---|
| Starting position | $590,000 |
| Cancel one card, reduce the other to $3,000 | +$45,000 |
| Pay out the car loan from savings ($6,800) | +$55,000 |
| Move to a lender that assesses HECS on actual repayments | +$12,000 |
| Include Amit's regular overtime (12-month history) | +$25,000 |
| Revised position | around $727,000 |
They now have $78,200 in savings, which is still more than the 10% deposit on a $700,000 package. With the First Home Owner Grant of $10,000 on a new build and the duty concession, their budget comfortably covers a $690,000 house-and-land package in Sunbury with a buffer for landscaping and fencing.
Checklist before you apply
- Credit card limits reduced or cancelled, with written confirmation
- Small loans and BNPL closed where affordable
- Three clean months of bank statements
- All income documented, including overtime, bonus and rental
- Credit report checked for errors (see credit score and home loans)
- Deposit consolidated in one account
- Lender selected on policy fit, not just rate
Common mistakes
- Applying first, tidying up later. Once the lender has your statements, the mess is on record.
- Keeping a "just in case" credit card. A $15,000 emergency card can cost you $60,000 of borrowing power.
- Understating living expenses. Assessors compare your declaration with your statements; a mismatch damages credibility more than a higher figure would.
- Ignoring HECS. The compulsory repayment is deducted from your net income every year until the balance is cleared. Paying out a small remaining balance can be worthwhile.
- Taking out a car loan before settlement. New debt after pre-approval is the most common reason formal approval is reduced.
- Chasing the lender with the highest calculator figure. The calculator is not the policy; only a fully assessed pre-approval tells you the real number.
Frequently asked questions
Does HECS reduce borrowing power?
Yes. Compulsory HECS/HELP repayments are taken from your salary before you see it, so lenders deduct them from your net income. On a $90,000 salary the repayment is several thousand dollars a year, which can reduce borrowing power by $30,000–$50,000 depending on the lender. If your balance is small, paying it out before applying can lift your capacity noticeably.
How much does a credit card reduce borrowing power?
Lenders count the full limit, not the balance, and assume a monthly commitment of around 3–4% of that limit. A $10,000 limit is treated as roughly $300–$400 a month, which reduces your maximum loan by about $35,000–$45,000. Cancelling the card or cutting the limit to what you actually use recovers most of that.
Can I increase my borrowing power quickly?
The fastest wins are cancelling credit cards, paying out small loans and closing BNPL accounts, all of which can be done within a week or two. Cleaning up bank statements takes three months. Choosing a lender with policy that suits your income type can add tens of thousands immediately, which is why a broker comparison is worth doing before you apply anywhere.
Does a bigger deposit increase borrowing power?
Not directly. Borrowing power is about repayment capacity, and a bigger deposit does not change your income or expenses. It does reduce the loan you need, lowers your LVR, removes LMI above 80% and often unlocks a cheaper rate, all of which help. It also gives the lender more comfort on a marginal application.
Why is my borrowing power lower than the bank's calculator said?
Online calculators use simplified assumptions and often skip the APRA buffer, HEM comparison and liability rules. A full assessment applies the actual rate plus 3 percentage points, uses your real statements, counts credit card limits and shades variable income. It is common for the assessed figure to land 10–20% below the calculator figure.
Will changing jobs affect my borrowing power?
It can. Most lenders want you past probation, and some require six to twelve months in your current role, though many accept a new permanent job in the same industry with a signed contract. Moving from permanent to casual or contract work is the change that hurts most. If a move is coming, talk to your broker about timing.
Talk to GNT Finance
Borrowing power is a puzzle of policy and preparation, and GNT Finance solves it every week for buyers across Mickleham, Craigieburn, Sunbury and the rest of Melbourne. Gorakh Timilsina's background as a senior credit officer means your application is structured the way an assessor wants to see it, at no cost to you for our home-loan service in most cases. Book a free consultation or call 0426 403 703.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.