How lenders work out borrowing capacity: income, expenses, buffer

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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Most Queensland buyers meet their borrowing capacity as a single number at the end of a conversation with a bank or a broker. It can be a pleasant surprise or a shock, and it is often quite different from the figure an online calculator produced the week before. It can also differ by tens of thousands of dollars between two lenders looking at the same payslips.

The number is not arbitrary. It comes out of a calculation with a small set of inputs, most of which a borrower can see, and one rule set by the banking regulator that applies to every bank in the country. This guide walks through that calculation in the order a lender does it: the income that counts, the expenses and debts taken off, the interest rate the bank is required to test against, the limit on large loans relative to income, and the deposit. It ends with why lenders disagree and what moves a limit up or down.

It describes how the system works in general. It is not advice about any one application, and each lender applies its own credit policy within the rules.

Australian Prudential Regulation Authority: macroprudential update of 28 May 2026 and submission on housing lending dated April 2026.

The two questions every lender asks

The Australian Prudential Regulation Authority (APRA) supervises banks, credit unions and building societies. In a submission on housing lending to a Senate committee dated April 2026, it describes a home loan assessment as two separate questions.

The first is ability to repay. Does the borrower have enough income, after living costs and other commitments, to meet the repayments? This is called serviceability, and it produces the borrowing capacity figure.

The second is indebtedness. How large is the loan compared with the property, and how large is the borrower's total debt compared with their income? The first comparison is the loan-to-value ratio, or LVR. The second is the debt-to-income ratio, or DTI.

A loan has to pass both. A household with a large income and a small deposit can pass the first and struggle on the second. A household with a large deposit and a modest income can find the reverse. Moneysmart, the consumer site run by the Australian Securities and Investments Commission, puts the same idea in everyday terms: lenders look at income and existing financial obligations, at savings and the size of the deposit, and at the borrower's credit score and credit report.

Income: what counts and what is discounted

The starting point is income before tax, converted by the lender into income after tax using the current tax scales. A salary paid at the same rate every fortnight is the simplest case and is generally counted in full.

Income that moves around is treated more cautiously. APRA's guidance to banks, as summarised in its April 2026 submission, is that variable sources such as bonuses and overtime should be discounted by at least 20 per cent, to reflect the chance that they will not continue at the same level. A borrower who earns $20,000 a year in overtime should therefore expect a bank to count no more than $16,000 of it, and some lenders will count less or want to see a longer history first.

The same logic applies to other income that is not guaranteed. Rental income from an investment property, commission, casual earnings and income from a business are all assessed under each lender's own policy, within APRA's expectation that banks allow for volatility. This is the first place two lenders can differ sharply. One may accept a year of self-employed income and another want two; one may count most of a regular bonus and another little of it.

Lenders verify what they are told. Payslips, tax returns, bank statements and employment details are requested because the bank must assess the real position, not a declared one. Moneysmart describes a pre-approval as involving evidence of the borrower's current financial situation for exactly this reason.

Living expenses

The second input is what the household spends. APRA's framework requires banks to consider the borrower's expenses and to collect reasonable estimates of them from the borrower. It is not prescriptive about the method. Its submission makes one point firmly: a statistical benchmark of typical household spending cannot take the place of asking the borrower.

In practice a lender does both. It asks the applicant to set out spending by category, such as groceries, transport, insurance, childcare, school fees, utilities and entertainment, and it compares the total with a benchmark for a household of the same size and income. Where the declared figure is lower than the benchmark, lenders commonly use the benchmark. Where it is higher, they use the declared figure. The effect is a floor under the expense figure, not a ceiling.

Some costs are hard to trim on paper. Private school fees, child support and private health insurance are commitments a lender will treat as continuing. A borrower who intends to cut spending after buying will generally find that the lender assesses the household as it is, not as it hopes to be.

For a buyer of a unit or townhouse in Queensland, body corporate levies are part of the picture, and so are council rates and insurance for any property. They are ongoing costs of owning the home and reduce what is left over for repayments.

Existing debts and commitments

The third input is debt the borrower already has. Car loans, personal loans, student debt, buy now pay later accounts and other home loans all carry repayments that come off the income available for the new loan.

Credit cards deserve a separate mention because of how they are usually counted. A lender will generally ask for the limit of each card, not only the balance owing, because the limit is what the borrower could draw tomorrow. A card that is paid off in full every month can therefore still reduce borrowing capacity. This is a matter of each lender's policy and worth asking about; it is also one of the few inputs a borrower can change quickly.

A bank also looks at the credit report. Moneysmart lists the credit score and report among the things lenders assess. The report shows existing accounts, applications made, and whether repayments have been on time, and a lender uses it both to check the debts declared and to judge the risk.

The serviceability buffer

With income, expenses and debts in hand, a lender could work out what is left each month and what loan that would repay at the going rate. It is not allowed to stop there.

APRA requires banks to assess whether the borrower could meet repayments at an interest rate at least 3.0 percentage points above the rate on the loan. This margin is the serviceability buffer. APRA last reviewed it on 28 May 2026 and left it unchanged at 3 percentage points, alongside its other lending settings.

The buffer is not a forecast. APRA describes it as a contingency for three things: interest rates rising, the borrower's income falling, or the borrower's expenses increasing. A loan runs for decades, and a household's circumstances change in ways nobody can foresee on the day of the application. In its May statement APRA said the buffer helps ensure that people who borrowed in recent years can go on servicing their loans in the face of higher expenses and interest rates.

It has a large effect on the answer. Because the test rate is 3 points above the actual rate, the repayment the lender must be satisfied about is far higher than the one the borrower will make.

In this example the household will pay about $3,386 a month. The bank has to be satisfied that it could find about $4,525.

A worked example from start to finish

The following example is illustrative. Every figure in it is an assumption chosen to show the method, and no lender's calculator will reproduce it exactly.

A couple in Queensland apply for a 30-year principal and interest loan at a variable rate of 6.25 per cent. After the lender has converted their salaries to after-tax income, applied its discount to one partner's overtime, subtracted living expenses at the higher of the declared figure and the benchmark, and subtracted the repayments on a car loan and the commitment on a credit card, it concludes they have $4,500 a month available for home loan repayments.

At 6.25 per cent, $4,500 a month would repay a loan of about $731,000. That is the figure an optimistic calculator might show.

The lender must test at 9.25 per cent. At that rate $4,500 a month repays a loan of about $547,000. That is the couple's borrowing capacity with this lender, about $184,000 less than the first figure, a reduction of roughly a quarter.

Two things follow. First, each rise in interest rates lowers the limit, because the test rate rises with the actual rate. Second, small changes to the monthly surplus matter a great deal. In this example each extra $100 a month of surplus supports about $12,000 more loan at the test rate, so closing a credit card or finishing a car loan before applying can shift the outcome more than a buyer expects.

The six-times line on debt and income

Serviceability is the first test. The second looks at the total.

A debt-to-income ratio compares everything the borrower owes, including the new loan, with gross annual income. A household earning $150,000 that would owe $900,000 in total has a ratio of six.

Since February 2026 APRA has limited how much lending banks can do at that level. Its information paper on the measure sets the limit this way: no more than 20 per cent of a bank's new mortgage lending may be at a debt-to-income ratio of six or more. The share is measured each quarter over a rolling four quarters, and it applies separately to the bank's owner-occupier lending and its investor lending.

Two kinds of loan are left out of the count: bridging loans for owner-occupiers, because they are temporary, and loans to buy or build a new dwelling.

This is a limit on banks, not on individual borrowers. A loan at seven times income is not prohibited. A bank simply has a ceiling on how many it can write, and may keep its own tighter rules to stay well under it. APRA said in its May 2026 update that high debt-to-income lending remained well below the limit, though it had been rising over the previous year, and its April submission put such loans at under 10 per cent of total lending. For most applicants the cap never comes into play. It is most likely to matter for borrowers with several properties, whose total debt is large relative to income even when each loan is serviceable.

The cap does not currently cover non-bank lenders. APRA's paper notes that they are outside it for now, and that the regulator has powers to extend such measures to lenders it does not supervise if needed. Its April submission puts non-bank lenders' share of the market at under 5 per cent.

Deposit, loan-to-value ratio and mortgage insurance

Capacity to repay sets one ceiling. The deposit sets another. A lender will advance only a share of what the property is worth, and that share, the LVR, depends on the deposit.

Moneysmart's guidance is to aim for a deposit of 20 per cent of the purchase price, plus the costs of buying. At that level the borrower generally avoids lenders mortgage insurance, a one-off premium that protects the lender, not the borrower, if the loan fails. Below 20 per cent the premium is usually added, and it rises as the deposit shrinks.

There are routes to buying with less. Moneysmart points to the Australian Government's 5 per cent deposit scheme, under which the government guarantees part of the loan so that eligible buyers can borrow without paying for mortgage insurance. The rules of that scheme, and of Queensland's own first home assistance, belong to another subject; the point here is only that a small deposit does not remove the serviceability test. A buyer using a guarantee still has to show the income to repay the larger loan, at the buffered rate.

The purchase costs matter to the sum as well. Transfer duty, legal fees and inspections come out of savings, and whatever is spent on them is not available as deposit.

Why two lenders give different answers

Every bank applies the same buffer. Almost everything else is policy, and policy differs.

Lenders differ on how much of each kind of variable income they count, above the minimum discount. They use different expense benchmarks and apply them differently. They treat existing debts in their own ways. They have their own limits on LVR for particular kinds of property, such as small apartments or homes in some regional towns, and their own appetite for loans near the six-times line.

Banks may also approve a loan that falls outside their standard policy, as an exception, where they judge the risk acceptable. APRA expects these to be few and to be watched closely by the bank's board. Its April 2026 submission puts exceptions to policy at under 5 per cent of new housing lending. An exception is the lender's decision, not something a borrower can demand.

Non-bank lenders are not supervised by APRA, so its prudential settings do not apply to them directly, although they remain credit providers under national credit law. Their policies, their test rates and their prices can all differ from a bank's, in either direction.

This spread is the practical case for comparing. Moneysmart describes a mortgage broker's job as including working out what a borrower can afford to borrow and finding options to suit, and notes that a broker must act in the borrower's best interests. A borrower who goes directly to lenders can do the same by asking more than one.

Pre-approval and what changes a limit

A pre-approval is a lender's indication of how much it would lend, based on the evidence provided. Moneysmart says it usually lasts three to six months, sets eligibility up to a stated amount, and is not a binding commitment on either side. Under the standard Queensland contract of sale a buyer can make the purchase subject to finance; a pre-approval is what makes that condition likely to be met, not a substitute for it.

A limit given in a pre-approval can change before the loan is formally approved. The common causes are:

• a rise in interest rates, which lifts the test rate
• a change of job, a move to probation or a drop in hours
• new debt taken on in the meantime, including a car loan or a new credit card
• the lender's valuation of the property coming in below the price
• the property itself falling outside the lender's policy.

The reverse is also true. Paying out a personal loan, lowering or closing an unused credit card, or building a longer record of overtime or business income can each raise the figure a lender arrives at.

Moneysmart suggests one more check that sits outside the lender's process altogether: working out what repayments would be if rates rose by 2 or 3 percentage points, and asking whether the household could live with them. A lender's test answers whether the bank is prepared to lend. Whether the borrower is comfortable borrowing that much is a separate question, and the two figures are often not the same.

Borrowing capacity is the most a lender will advance on the day it is asked. It is a ceiling set by rules and policy, and it moves every time rates, income or debts do.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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