Your borrowing capacity determines how much a lender will approve, not just how much you want to borrow.
Lenders assess your income, expenses, debts, and financial commitments using a formula that applies a serviceability buffer of at least 3.0 percentage points above the actual loan product rate. That buffer means your application is tested at a rate higher than what you will pay, ensuring you can still afford repayments if rates rise. The result is a borrowing limit that may be tens or even hundreds of thousands of dollars lower than you expected, particularly if your outgoings are high or your income structure is unclear.
How Lenders Calculate What You Can Borrow
Borrowing capacity is calculated by taking your net income, subtracting your living expenses and existing debt commitments, then applying the serviceability buffer to determine the maximum loan amount you can service. Each lender uses a slightly different formula, but all are required to assess your ability to repay at a rate at least 3.0 percentage points above the loan product rate.
Consider a dual-income household in Croydon Park earning a combined $150,000 per year. After tax, superannuation, and deductions, net income sits around $115,000 annually. The lender subtracts childcare costs of $18,000 per year, car loan repayments of $8,000, and living expenses based on the Household Expenditure Measure, which for a family of four might total $45,000. That leaves around $44,000 in net surplus. The lender then calculates how much debt that surplus can service at the test rate. If the variable rate is 6.0 per cent, the test rate becomes 9.0 per cent. At that test rate, a $44,000 annual surplus supports a loan amount of approximately $450,000 on a principal and interest basis over 30 years. The same household tested at the actual rate of 6.0 per cent could service closer to $600,000, but the lender will only approve the lower figure.
Income Structure and How It Affects Approval
Not all income is treated equally. Lenders apply different assessment policies to base salary, overtime, bonuses, commissions, rental income, and self-employment income.
Base salary from a permanent role is assessed at 100 per cent, provided you are past probation. Overtime and bonuses are typically averaged over the past two years and shaded by 20 to 50 per cent depending on the lender. Rental income from an investment property is generally assessed at 80 per cent of the gross rent to account for vacancy and maintenance. Self-employed income requires two years of tax returns and is assessed on the net profit after add-backs for non-cash deductions like depreciation. If you have recently started a business or moved to a commission-based role, your borrowing capacity may be limited until you can demonstrate consistent earnings over a full financial year.
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Debt Commitments That Reduce Your Borrowing Power
Existing debts are deducted from your serviceability at their minimum repayment or a notional repayment set by the lender, whichever is higher. Credit cards are treated as though the full limit is drawn, even if the balance is zero.
A credit card with a $10,000 limit is assessed as though you owe $10,000 at a repayment rate of around 3.0 to 3.8 per cent of the limit per month, depending on the lender. That equates to a monthly commitment of $300 to $380, or $3,600 to $4,560 per year. Over 30 years at a 9.0 per cent test rate, that annual cost reduces your borrowing capacity by approximately $45,000. If you hold three cards with a combined limit of $30,000, the impact is $135,000 in lost borrowing power, even if you pay the balance in full each month.
Closing unused cards or reducing limits before you apply for a home loan can lift your capacity significantly. Personal loans, car loans, and buy-now-pay-later accounts are all assessed at their actual repayment amount and reduce your available income in the same way.
Living Expenses and the Household Expenditure Measure
Lenders no longer rely on your declared expenses alone. Most use the Household Expenditure Measure, a benchmark developed by the banking industry that estimates minimum living costs based on household size, income, and location. If your declared expenses are lower than the benchmark, the lender will use the higher figure.
For a household in Croydon Park with two adults and two children earning $150,000 per year, the Household Expenditure Measure might calculate minimum monthly expenses of $3,700 to $4,200, or around $45,000 to $50,000 annually. If you declare $2,500 per month because you budget carefully, the lender will still apply the benchmark. Discretionary spending on subscriptions, dining, and entertainment is built into the measure, so trimming those costs before applying will not change the lender's assessment unless your actual expenses exceed the benchmark.
Debt-to-Income Limits and What They Mean for You
From 1 February 2026, lenders regulated by APRA are restricted in how much they can lend to borrowers with a debt-to-income ratio of six times or greater. Each lender can approve up to 20 per cent of new owner-occupier loans and 20 per cent of new investor loans to borrowers in this category.
If your total debt, including the proposed loan, is more than six times your gross income, you may still be approved, but the lender has less flexibility. For a buyer in Croydon Park earning $120,000 per year, a debt-to-income ratio of six equates to total borrowings of $720,000. If you are seeking a larger loan, the lender may require a higher deposit, a co-borrower, or additional documentation to demonstrate strong serviceability. Non-bank lenders are not subject to this restriction and may offer more flexibility, though rates and fees can differ.
Changing Your Financial Position Before You Apply
Small adjustments made months before you apply can have a material impact on your borrowing capacity. Paying down debt, closing accounts, and consolidating repayments all increase the net income available for your loan.
In a scenario where a buyer reduces a $15,000 personal loan balance to zero and cancels two credit cards with a combined limit of $20,000, the annual serviceability impact is around $6,500. At a 9.0 per cent test rate over 30 years, that frees up approximately $80,000 in additional borrowing capacity. The same buyer who switches from a casual role to permanent employment and demonstrates three months of consistent base salary may also unlock income that was previously shaded or excluded entirely.
These changes take time to appear on your credit file and in your payslips, so starting the process early gives you the strongest position when you are ready to submit an application.
How Croydon Park Property Prices Affect Your Deposit and Loan Size
Croydon Park sits within the inner west, bordered by Enfield to the north and Belmore to the south, with strong access to Burwood and the broader Canterbury-Bankstown corridor. The suburb appeals to a mix of families and investors due to its proximity to transport, schools, and parkland including Cuthbert Reserve. Property types range from older freehold homes to newer townhouses and unit developments.
Borrowing capacity is one part of the equation. Deposit size and the loan-to-value ratio determine whether you pay Lenders Mortgage Insurance and whether you are eligible for schemes like the Australian Government 5% Deposit Scheme. If your borrowing capacity is $600,000 and you have a 10 per cent deposit, you can purchase a property valued at approximately $670,000, subject to LMI. If you qualify for the 5% Deposit Scheme, the same borrowing capacity allows you to purchase up to $630,000 without LMI, provided the property falls within the scheme's price cap of $1,500,000 for capital cities and regional centres in New South Wales.
Understanding what you can borrow, and what you can actually buy with that borrowing limit, helps you set a realistic property search range before you start attending inspections.
Call one of our team or book an appointment at a time that works for you. We will run a full assessment of your borrowing capacity, identify the lenders that will give you the highest approval, and show you exactly what changes will increase your borrowing power before you apply.
Frequently Asked Questions
How do lenders calculate my borrowing capacity?
Lenders take your net income, subtract living expenses and debt commitments, then apply a serviceability buffer of at least 3.0 percentage points above the loan product rate to determine the maximum loan you can afford. The result is the borrowing limit you will be approved for, which is often lower than what you could repay at the actual rate.
Why does a credit card I never use reduce my borrowing capacity?
Lenders assess credit cards as though the full limit is drawn, regardless of your actual balance. A $10,000 limit can reduce your borrowing power by around $45,000 because the lender assumes you could max out the card at any time.
What income can I use to support a home loan application?
Base salary from permanent employment is assessed at 100 per cent. Overtime, bonuses, and commissions are typically averaged over two years and shaded by 20 to 50 per cent. Rental income is assessed at around 80 per cent of gross rent, and self-employed income requires two years of tax returns.
How does the debt-to-income limit affect my application?
From 1 February 2026, lenders regulated by APRA can approve only 20 per cent of new loans to borrowers with a debt-to-income ratio of six times or greater. If your total debt exceeds six times your income, you may still be approved, but the lender has less flexibility and may require a larger deposit or co-borrower.
What changes can I make to increase my borrowing capacity?
Paying down existing debts, closing unused credit cards, reducing card limits, and switching to permanent employment all increase your net income and raise your borrowing limit. These changes need time to show on your credit file and payslips, so start early.
