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.
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 Cap
APRA collects data on loans written above 6× debt-to-income and flags banks where the share is rising. Most majors now treat 6× DTI as a soft ceiling and 7–8× as a hard ceiling regardless of serviceability surplus. See APRA's quarterly ADI property exposures statistics.
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 use generic HEM and assume clean credit. Actual pre-approval pulls your credit file, verifies income via payslips and ATO income statements, applies lender-specific shading to bonus and overtime income (typically 80%), and tests a curated expense list against your bank statements. Self-employed borrowers face an additional layer: most banks require two years of tax returns and add back depreciation and interest. ASIC's Moneysmart borrowing-power guidance explicitly warns that calculator outputs are indicative.
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 $30,000 limit you never use still consumes about $900/month of serviceability. Cancel cards you do not need before applying.
- Treating bonus and overtime as base income. Lenders typically shade variable income to 80% and require two years of evidence.
- 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.
