How Lenders Decide What You Can Borrow
Borrowing power is not a single number — it is the smallest of three constraints: serviceability, deposit/LVR, and debt-to-income (DTI) policy. A calculator estimates the first; the other two can override it.
Serviceability: Income Minus HEM Minus Buffered Repayments
Lenders calculate net monthly surplus as:
Surplus = Net income − (HEM or declared expenses, whichever is higher) − existing debt commitments − stressed repayment on the new loan
If surplus is positive, the loan services. The "stressed repayment" uses the contracted rate plus APRA's 3% buffer, as required under APG 223. For a current worked example, see how 2026 rate rises affect borrowing power.
The Household Expenditure Measure (HEM) is a benchmark produced by the Melbourne Institute that estimates median spending for a household of a given size, location, and income band. Banks use it as a floor on declared living expenses — if you claim you live on $2,000 a month and HEM for your profile is $4,800, the bank uses $4,800. ASIC's responsible-lending obligations require lenders to make reasonable inquiries; HEM is the safety net, not a target.
The DTI Portfolio Limit
From 1 February 2026, APRA limits the share of new lending that authorised deposit-taking institutions can write at 6× debt-to-income or more. It is a portfolio limit for banks, not a hard eligibility ceiling for an individual borrower. Use the debt-to-income ratio calculator to check the mathematical multiple, then assess serviceability separately. See APRA's macroprudential DTI measure.
DTI is calculated on gross household income against total debt — including the new mortgage, HELP debts, credit card limits (not balances), buy-now-pay-later facilities, and existing investment loans.
Worked Example: Couple on $180,000 Combined
- Gross household income: $180,000 ($110,000 + $70,000)
- Net monthly income: roughly $11,500 after PAYG tax
- HEM for a couple, no kids, metro: ~$4,400/month
- Credit card limits: $20,000 combined → assessed as ~$600/month commitment
- HECS debt: $35,000 → ~$650/month at the relevant repayment threshold
- No existing home loan
Available for new mortgage repayment: 11,500 − 4,400 − 600 − 650 = $5,850/month.
At a stressed rate of 9.35% (6.35% contract + 3% APRA buffer), $5,850 services a loan of approximately $720,000 over 30 years, solving the amortisation formula in reverse.
DTI check: $720,000 ÷ $180,000 = 4.0× — well inside the 6× threshold.
So this couple's serviceability ceiling is around $720k. With a 20% deposit they could buy at $900k; with LMI and a 10% deposit, around $800k. The same couple with two children would face HEM closer to $5,800, dropping borrowing capacity to roughly $550k — a $170k swing from dependants alone.
Why Calculator Estimates and Pre-Approval Diverge
Online calculators cannot reproduce a lender's complete assessment. APRA's current residential mortgage guidance says prudent banks verify income and expenses using evidence that may include employment status, payslips, tax records, bank statements and business documents. It also says temporarily high or uncertain income should be discounted or disregarded, with discounts of at least 20% described as prudent for most non-salary income. The actual treatment and evidence period vary by lender and applicant. Read what income lenders may count for a home loan for the evidence categories and limitations, then use the home-loan application documents checklist to prepare a lender-agnostic file. ASIC's Moneysmart borrowing-power guidance warns that calculator outputs are indicative, while APRA's APG 223 sets out the prudential context for regulated banks.
Do not replace documented personal income with a national earnings benchmark. The Average Weekly Earnings definition explains why the ABS full-time adult average is not a typical salary or lender assessment, and the May 2026 earnings update records the current figures and limitations.
The Wage Price Index versus Average Weekly Earnings guide explains why an economy-wide wage-growth rate is also not a personal pay rise. Only enter income supported by current records.
Common Mistakes
- Using gross income against net repayments. Income tax cuts the top line by 25–35% before a single dollar reaches the mortgage.
- Forgetting credit card limits. A lender may assess the approved limit rather than the current balance, reducing capacity even when the card is unused. Ask the lender how it treats each limit before changing an account.
- Treating bonus and overtime as base income. APRA describes discounts of at least 20% as prudent for most non-salary income, but the actual discount and evidence period vary by lender and circumstances.
- Ignoring HECS. Once household income crosses the repayment thresholds in the ATO HELP repayment table, HELP repayments scale up to 10% of income.
- Assuming all lenders calculate the same way. Non-major banks and non-banks vary in how they treat rental income, negative gearing, and trust distributions. The same borrower can see a $200k spread between lenders.
