Simple hacks to calculate your borrowing capacity

Lender serviceability models determine the maximum loan amount prior to assessing deposit adequacy or valuation.

The fundamental calculation compares net income after taxation and existing obligations against proposed loan repayments assessed at a rate materially higher than the contracted product rate. Lenders apply a minimum serviceability buffer of 3.0 percentage points above the product interest rate when assessing capacity, pursuant to prudential requirements issued by the Australian Prudential Regulation Authority. Where a borrower applies for a variable rate home loan at 6.2 per cent per annum, the lender calculates repayment capacity using a notional rate of 9.2 per cent. This buffer applies to all new borrowers and is intended to ensure borrowers can service the obligation in a rising rate environment.

Consider a dual-income household in Phillip earning combined assessable income of $145,000 per annum. One applicant carries a motor vehicle finance commitment with monthly repayments of $580. The household seeks to purchase an owner-occupied property and wishes to determine the maximum loan amount a participating lender is likely to approve. Net income after taxation, the Medicare levy, and superannuation is approximately $106,000 per annum, or $8,833 per month. The lender applies serviceability policy that permits up to 42 per cent of net monthly income to be allocated to the proposed home loan repayment, after deducting existing obligations and an allowance for living expenses. The motor vehicle commitment reduces available serviceability by $580 per month. The lender applies the Household Expenditure Measure, a benchmark living cost estimate scaled to household composition and income, which in this scenario approximates $3,200 per month for a two-person household. Uncommitted surplus income is therefore $8,833 less $580 less $3,200, equating to $5,053 per month. Assessed at the buffered rate of 9.2 per cent over a 30-year term, the household can service a principal and interest loan of approximately $630,000. Eliminating the motor vehicle commitment prior to application would increase capacity to approximately $710,000, illustrating the material influence of non-housing debt on assessable borrowing capacity.

Uncommitted monthly income is the sole variable under direct applicant control during the assessment period.

Lender serviceability policy, the mandated buffer rate, and the Household Expenditure Measure are non-negotiable inputs. Applicants cannot alter those parameters. Income documentation standards are prescribed under responsible lending obligations and permit declaration of salary, overtime where evidenced over a minimum consecutive period, rental income net of non-deductible expenses and a retention percentage, and certain self-employed earnings net of business expenses and tax. The ACT's public service workforce comprises a substantial proportion of salaried employees with structured pay scales and transparent remuneration frameworks, which generally supports consistent income verification. Applicants earning additional remuneration through allowances, shift penalties, or performance incentives must provide payslips covering a continuous period, typically three months for PAYG income and up to 24 months for variable commission structures. Where income has been received consistently over the required period and is expected to continue, lenders will incorporate that income into serviceability calculations at varying inclusion rates depending on classification.

Borrowers seeking to maximise assessed income must ensure all assessable income components are disclosed and substantiated at the point of application. A scenario involving an applicant in Gungahlin with base salary of $82,000 and overtime payments averaging $14,000 per annum demonstrates this principle. If the applicant fails to declare the overtime or is unable to provide consecutive payslips evidencing receipt over the required period, borrowing capacity is calculated on the base salary only. Where documentation supports continuous receipt and the employer confirms the overtime is ongoing, the lender may assess total income of $96,000, increasing borrowing capacity by approximately $120,000 on a principal and interest owner-occupied loan structure assessed under the current prudential framework.

Debt-to-income lending limits impose a separate constraint on a minority of ACT applicants from 1 February 2026.

The Australian Prudential Regulation Authority activated a debt-to-income lending limit on 27 November 2025, effective from 1 February 2026, applying to all authorised deposit-taking institutions. Each lender may extend, measured on a quarterly basis, up to 20 per cent of new owner-occupier loans and up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times gross income or higher. The limit applies separately to owner-occupier and investor portfolios and applies to new lending only. Bridging loans for owner-occupiers and loans for the purchase or construction of new dwellings are excluded from the restriction. Existing borrowers are not affected.

The debt-to-income ratio is calculated by dividing total proposed borrowing across all housing loans by gross annual income before taxation. A borrower with gross income of $110,000 seeking a loan of $660,000 or more would exceed the six times threshold and would be subject to the quarterly allocation if the loan is for an established dwelling and not a bridging facility. Lenders have not published the methodology by which applications are prioritised within the 20 per cent allocation. In practice, applicants with strong serviceability, substantial deposit buffers, and stable employment history are more likely to be approved where the debt-to-income ratio exceeds six times. Those relying on maximum assessed serviceability with minimal deposit surplus may be declined or subject to delayed approval pending availability within the lender's quarterly allocation.

Loan product structure alters the required income to achieve equivalent borrowing.

Principal and interest repayments are higher than interest-only repayments during the interest-only period, requiring greater income to service the same loan amount. An interest-only loan assessed on a $600,000 facility at the buffered rate requires monthly repayments of approximately $4,600, compared to approximately $5,790 for a principal and interest loan on the same amount, term, and rate. The difference of $1,190 per month represents additional uncommitted income required to satisfy serviceability for the principal and interest structure. However, the majority of lenders assess interest-only applications using principal and interest serviceability for loans where the loan-to-valuation ratio exceeds 80 per cent, neutralising the serviceability advantage unless the borrower is contributing a deposit exceeding 20 per cent of the property value.

Split loan structures combining fixed and variable components do not increase borrowing capacity relative to a single variable rate loan where both are assessed as principal and interest repayments over 30 years. The lender applies the serviceability buffer to each component independently and aggregates the result. Offset account functionality, redraw availability, and portability are product features that do not affect the income assessment calculation but may influence the applicant's capacity to maintain repayments or respond to financial disruption during the life of the loan.

Lenders Mortgage Insurance permits borrowing at loan-to-valuation ratios exceeding 80 per cent but does not increase the loan amount assessed as serviceable.

Lenders Mortgage Insurance is a risk mitigation product that allows the lender to advance funds where the loan amount exceeds 80 per cent of the property value. The premium is calculated on a sliding scale based on loan amount and loan-to-valuation ratio and is a cost borne by the borrower. Eligible insurance, as defined under Prudential Standard APS 112, must provide cover for all losses up to at least 40 per cent of the higher of the original loan amount and the outstanding loan amount. The premium may be capitalised into the loan amount, subject to the capitalised loan remaining within the maximum loan-to-valuation ratio permitted by the lender's policy, typically 95 per cent for established dwellings and up to 97 per cent for transactions involving the Australian Government 5% Deposit Scheme administered by Housing Australia.

Capitalising the premium increases the principal outstanding and therefore increases the required monthly repayment. That increased repayment must be serviceable within the borrower's assessed capacity. Where a borrower has been assessed as able to service a loan of $680,000 and elects to capitalise an insurance premium of $22,000, the total loan amount of $702,000 must fall within the original serviceability limit. If the repayment on $702,000 exceeds the amount the borrower can service, the application will be declined or the loan amount reduced. The Australian Government 5% Deposit Scheme removes the requirement for the borrower to pay the insurance premium by substituting a Commonwealth guarantee to the participating lender. Borrowing capacity is unaffected by the guarantee; the applicant must still satisfy the lender's serviceability assessment, the mandated buffer, and all responsible lending obligations under the National Consumer Credit Protection Act 2009. The scheme does not relax income or employment criteria and does not permit a higher debt-to-income ratio than would otherwise apply. Property price caps apply and vary by jurisdiction. In the Australian Capital Territory, the cap is $1,000,000 across all areas. Both the purchase price and the lender's assessed valuation must be at or below the cap.

Pre-approval confirms borrowing capacity and positions the applicant to act on a purchase opportunity with certainty regarding available funding.

A home loan pre-approval is an assessment completed prior to identifying a specific property. The lender evaluates income, employment stability, existing liabilities, credit history, and serviceability, and issues a conditional approval for a stated loan amount, subject to valuation of the nominated security property and satisfaction of any outstanding conditions. Pre-approval does not bind the applicant to proceed with that lender, nor does it oblige the lender to settle the loan if material circumstances change between approval and settlement. Pre-approval is typically valid for a period of 90 days, though validity periods vary by lender.

ACT applicants seeking properties in competitive precincts including Braddon, Kingston, and Barton benefit from the certainty that pre-approval provides when submitting offers or attending auction. Vendors and selling agents assess the likelihood of settlement when evaluating competing offers. An applicant with confirmed pre-approval, verified deposit funds, and an unconditional finance clause represents lower counterparty risk than an applicant without formal lender confirmation. The pre-approval process also identifies documentation deficiencies, unrecorded liabilities, or adverse credit events that may require remediation prior to formal application, reducing the likelihood of declined applications or settlement delays.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions