Understanding borrowing capacity.
Borrowing capacity is the amount a lender is willing to let you borrow based on your income, expenses, debts and overall financial position. It’s not always the number people expect — some are surprised at how much they can borrow, others at how much the bank won’t lend compared to what feels affordable in their real-world budget.
Because every lender calculates borrowing capacity differently, the same person can get five very different results from five banks. At Lumo, we help clients understand why the numbers vary and which lender is the best fit for their situation.
How lenders calculate your borrowing capacity
While each lender uses its own model, most assessments include the same fundamental categories:
1. Your income
Lenders consider your income type, stability and history.
Examples include:
Salary or wages
Bonuses, commissions or overtime
Government payments
Rental income
Self-employed income (assessed differently)
Some lenders use only 80% of certain income types (e.g., overtime or commissions), while others use more — which is why results vary between banks.
2. Existing debts
Lenders must include all financial commitments, such as:
Credit cards (full limit, not balance)
HECS/HELP or other education loans
Personal loans and car loans
Buy-now-pay-later services
Overdrafts
Other mortgages
Even unused credit limits affect borrowing capacity because they represent potential future obligations.
3. Living expenses
Lenders use a combination of:
Your declared expenses
Benchmarked minimum costs
Recent bank statement behaviour
Common categories include groceries, utilities, transport, childcare, insurance, medical, subscriptions, entertainment and more.
If your actual spending exceeds benchmarks, lenders use the higher amount.
4. Interest rate buffers
This is a major reason borrowing capacities have shifted in recent years.
Lenders test your ability to repay the loan at a higher rate than you actually pay — usually around 3% above the current rate.
Example:
If you apply for a loan at 6%, the bank assesses you as if the loan were at 9%.
This ensures you can still meet repayments if rates rise.
5. Loan purpose and structure
Borrowing capacity can change depending on whether the loan is:
Owner-occupied or investment
Principal & interest or interest-only
Fixed or variable
Investment loans, for example, may allow some rental income but with a discount applied.
Why borrowing capacity differs between lenders
Two lenders can assess the exact same person and reach completely different outcomes because of:
How they treat overtime, bonuses and commission
How they assess self-employed income
Different buffers or shading rules
How strictly they interpret expenses
Their treatment of HELP debt
Whether they include negative gearing benefits
Locational risk assessments
Their appetite for certain borrower profiles
This is why researching borrowing capacity online is rarely accurate — and why relying on a single bank can limit your options.
At Lumo, we compare multiple lenders upfront to find the one that matches your financial profile and long-term plans.
Tax and income documents you’ll need
To calculate borrowing capacity properly, lenders typically require:
Recent payslips
Employment contract or income statement
Tax returns (especially for self-employed)
Rental statements (if applicable)
Bank statements
Information on all debts
Having these ready early helps us provide accurate assessments.
How to improve your borrowing capacity
There are practical ways to strengthen your position before applying:
Reduce or close unused credit cards
Consolidate small debts (strategically)
Review subscription and recurring expenses
Build a consistent savings pattern
Reduce discretionary spending before applying
Choose lenders who use favourable income treatment for your occupation
These refinements can move the needle significantly.
Borrowing capacity vs comfort level
A lender may approve a certain amount, but that doesn’t mean it’s the right amount for you.
We always help clients compare:
The bank’s number
Your personal comfort level
Your future goals
The impact of potential rate rises
Good lending isn’t about stretching to the maximum — it’s about choosing a level that feels sustainable and aligns with your long-term plans.
Let’s chat.
Want to understand your real borrowing capacity across multiple lenders — not just one estimate? We can map it out clearly and help you plan your next steps with confidence. Let’s chat.
This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.