Borrowing power — also called borrowing capacity or serviceability — is the maximum amount a lender is prepared to lend you based on your income, expenses, existing debts and the loan's interest rate. Every Australian lender uses a serviceability calculator, and while the inputs are similar across lenders, the exact weightings differ — which is why your maximum borrowing amount can vary significantly from one lender to another. Understanding how the calculation works gives you the ability to maximise your capacity legitimately.
How Lenders Assess Your Income in Australia
Not all income is treated equally by Australian lenders. PAYG (salary) income is generally taken at 100% of gross earnings. Regular overtime, shift allowances and commission may be accepted at 50–80% depending on the lender and how long you have been receiving it (usually two years of history required). Rental income from investment properties is typically assessed at 70–80% of gross rent (the 'shading' accounts for vacancy, maintenance and management costs).
Self-employed applicants present a more complex picture. Lenders typically require two years of tax returns and financial statements, and calculate income based on the lower of the two years (or an average, depending on the lender). Business add-backs — depreciation, one-off expenses, director fees — can be included by some lenders to increase the assessed income figure. Dividends from private company investments are generally accepted if evidenced by tax returns.
Second Jobs and Casual Income
A second job or casual income can increase your borrowing power, but lenders typically require 12 months of evidence of that income. Recent casual employment or a new second job started within the last six months will generally not be accepted. Plan ahead if you are starting a second job to boost your borrowing capacity — wait until you have 12 months of history before applying.
- ✓PAYG salary — 100% of gross income
- ✓Casual employment — 100% if 12 months history with same employer
- ✓Overtime/commission — 50–80% with two years history
- ✓Rental income — typically 70–80% of gross rent
- ✓Self-employed — based on two-year tax returns (lower year or average)
- ✓HECS-HELP repayments — deducted as an expense even if compulsory
The HEM: How Lenders Assess Your Living Expenses
The Household Expenditure Measure (HEM) is an ASIC-referenced benchmark representing the minimum plausible living expense for a household of a given size and income level. Most Australian lenders use HEM as the floor for living expense assessment — if the expenses you declare are lower than HEM, the lender substitutes HEM.
HEM values are updated quarterly and vary based on location, relationship status and number of dependants. As a general guide, HEM for a single adult in 2026 is approximately $2,200–$2,600 per month; for a couple with two children, approximately $4,200–$4,800 per month. In practice, lenders take the higher of your declared expenses and HEM. Honestly declaring your expenses (particularly discretionary spending, dining, subscriptions and lifestyle costs) avoids post-approval surprises.
Never Understate Expenses on a Home Loan Application
Understating living expenses on a home loan application can constitute financial fraud and invalidates the lender's responsible lending assessment. If the loan becomes unaffordable and the lender discovers the declared expenses were inaccurate, it can affect your rights and protections. Always accurately declare your actual spending.
The APRA 3% Serviceability Buffer and How It Reduces Your Borrowing Power
Under APRA's prudential standards, all Australian lenders must assess whether you can afford your loan repayments at an interest rate of at least 3% above the loan's actual rate. This buffer was set at 3% in October 2021 (up from 2.5%) to ensure borrowers can still service their debt if rates rise significantly.
What this means in practice: if you are applying for a variable rate loan at 6.0% p.a., your serviceability is assessed at 9.0% p.a. The higher the assessment rate, the higher the assumed repayment, and the lower your calculated borrowing capacity. This is why borrowing capacities decreased substantially when the RBA raised rates in 2022–2023, and why they increase (but not fully) as rates fall. The buffer does not disappear as variable rates fall — it is always 3% above the actual loan rate.
Why Borrowing Capacity Varies Between Lenders
Two borrowers with identical income and expenses can receive different maximum borrowing amounts from different lenders. This is because lenders use different HEM tables, apply different shading rates to rental income, have different policies on income types, and use different internal expense models. A mortgage broker who works across multiple lenders can identify which lender's calculator produces the best outcome for your specific situation.
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About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.