How to Increase Borrowing Power

Your borrowing power determines how much a bank will lend you for a home loan. Understanding what affects this figure—and how to improve it—can make the difference between buying your dream property or falling short. This guide explains exactly how Australian banks assess borrowing capacity in 2026 and provides practical strategies to maximize it.

How Banks Calculate Your Borrowing Power

Banks use a straightforward formula, but the devil is in the details. The basic calculation is:

Gross Income − (Tax + Existing Commitments + Living Expenses + New Loan Payments + Buffer) = Surplus

If your surplus is positive after all these deductions, you can service the loan. If not, the bank will either reduce the loan amount or decline your application.

The APRA Serviceability Buffer

The Australian Prudential Regulation Authority (APRA) requires lenders to assess your ability to repay at an interest rate at least 3% higher than the actual loan rate. This is called the serviceability buffer.

Real Example

If you're applying for a home loan at 6% interest, the bank will assess whether you could still make repayments if rates rose to 9%. This stress test ensures you have a buffer for rate increases.

The assessment rate varies between lenders. A borrower earning $90,000 annually might borrow:

$534,612 when assessed at 7.25%
$653,100 when assessed at 5.05%

That's a $118,488 difference based purely on which lender's assessment rate you're dealing with. This is why broker selection and lender comparison matter.

Key Factors That Affect Borrowing Power

1Income

Banks consider multiple income types, but not all income is treated equally:

Base salary: Counted at 100%
Overtime: Often counted at 50% (requires consistent history)
Bonuses: Typically requires 2-year history, may be averaged or discounted
Rental income: Usually 70-80% counted (to account for vacancy and maintenance)
Commission: Requires 2-year history, often discounted or averaged
Centrelink payments: Accepted by some lenders

2Living Expenses (HEM)

Banks use the Household Expenditure Measure (HEM) to benchmark your living costs. HEM categorizes households by size, location (metro vs regional), and income brackets.

Critical change in 2023: Banks now place more weight on your actual transaction history rather than just HEM estimates. If you're spending significantly above HEM in discretionary categories (dining out, entertainment, subscriptions), it will reduce your borrowing capacity—even if you plan to cut back after buying.

3Existing Debts

Every dollar of existing debt reduces your borrowing capacity. Here are the real numbers:

Debt Type	Impact on Borrowing Power
Credit card ($5,000 limit)	Reduces capacity by ~$32,000
Personal loan ($500/month)	Reduces capacity by ~$155,000
HECS debt ($100k income)	Reduces capacity by ~$84,000
Buy Now Pay Later	Assessed as credit facility

Important: Banks assess based on your credit limit, not your balance. An unused $10,000 credit card still reduces your borrowing power by approximately $64,000.

4Debt-to-Income (DTI) Ratio

Your DTI ratio is your total debt divided by your gross annual income. While not a hard cap for all lenders, APRA monitors loans with DTI ratios above 6x closely.

As of March 2025, about 5.3% of new loans had DTI ratios of 6 or higher. Many lenders have internal caps (often 6-7x income), which can block applications regardless of other factors. Some lenders are more flexible than others, which is where broker expertise matters.

Practical Strategies to Increase Borrowing Power

1. Pay Down or Eliminate Debts

This is the single most effective strategy.

Close unused credit cards: If you have a $10,000 limit you never use, close it. Instant $64,000 boost.
Pay off personal loans: A car loan costing $500/month reduces your capacity by $155,000. If you can clear it, do it before applying.
Reduce credit limits: If you can't close a card, reduce the limit to the minimum you actually use.
Avoid Buy Now Pay Later: Banks treat these as credit facilities. Close them before applying.

Case Study

Sarah earns $95,000 and has a $15,000 credit card limit (barely used), a $400/month car loan, and a $3,000 Afterpay account. By closing the credit card, paying off the car loan early, and closing Afterpay, she increased her borrowing power by approximately $220,000.

2. Reduce Living Expenses (Before You Apply)

Banks review 3-6 months of transaction history. Cleaning up your spending before you apply is crucial:

Cancel unused subscriptions (streaming, gym, apps)
Reduce discretionary spending (dining out, entertainment)
Avoid large cash withdrawals (banks can't see where it went)
Consolidate accounts to show clear savings discipline

You don't need to live like a monk forever—just demonstrate financial discipline during the assessment period. If your expenses are significantly above HEM benchmarks, lenders will use the higher figure, reducing your capacity.

3. Use a Skilled Mortgage Broker

Not all lenders are created equal. Key differences:

Assessment rates: Can vary from 5.05% to 7.25%+ (huge impact on borrowing capacity)
Income treatment: Some lenders accept 100% of overtime; others accept 50% or none
Non-bank lenders: Not bound by APRA's 3% buffer—some may use smaller buffers or different criteria
DTI flexibility: Some lenders cap at 6x income; others go higher for strong applications

A good broker knows which lenders suit your situation and can potentially add $50,000-$150,000 to your borrowing capacity by choosing the right lender.

4. Optimize Your Loan Structure

Longer loan terms: A 30-year loan has lower monthly repayments than a 25-year loan, improving serviceability (you can always make extra repayments later)
Interest-only periods: Some investors use IO periods to maximize borrowing capacity for their next purchase (but understand the risks)

5. Maximize Income Recognition

Include all eligible income: rental income, regular bonuses, consistent overtime
Provide 2+ years of tax returns for self-employed or commission-based income
Consider timing: Apply after receiving a pay rise or when overtime has been consistent for 6-12 months

6. Improve Your Credit Score

While not directly part of the borrowing power formula, a poor credit score can result in decline or reduced offers:

Pay all bills on time for at least 6 months before applying
Don't apply for multiple credit products in a short period
Check your credit file for errors and dispute them if found
Avoid payday lenders, which are red flags for mainstream lenders

7. Consider Co-Borrowing

Applying with a partner or family member combines incomes, potentially significantly increasing borrowing power. However, both parties are jointly liable for the full debt, and both credit histories are assessed.

2026-Specific Factors

Lower Tax Rates = Higher Borrowing Power

Tax cuts that took effect in 2024-25 increased take-home pay for many Australians. This directly improves your net income position in lenders' calculations. For example, a couple with no dependents could potentially borrow up to $47,000 more due to tax cuts compared to previous years.

Heightened Scrutiny on Discretionary Spending

In 2026, lenders are paying closer attention to discretionary spending patterns. Regular spending on gambling, luxury goods, or excessive Uber Eats can raise red flags and reduce assessed borrowing capacity.

Interest Rate Environment

With the RBA holding rates higher for longer, the 3% serviceability buffer means borrowers are being stress-tested at even higher rates. This has compressed borrowing capacity compared to the low-rate environment of 2020-2021.

Common Mistakes That Reduce Borrowing Power

❌ Leaving unused credit cards open: Each $1 of limit reduces capacity by ~$6.40
❌ Making large cash withdrawals: Banks can't see where it went and may assume the worst
❌ Applying for credit before mortgage pre-approval: New credit inquiries hurt your application
❌ Job hopping close to application: Lenders prefer 3-6 months employment stability
❌ Not disclosing all debts: Banks will find them anyway, and lying is grounds for decline
❌ Irregular income deposits: Makes it harder to prove consistent income
❌ Applying to the wrong lender first: A decline stays on your credit file and makes others nervous

Timeline: When to Start Preparing

Timeframe	Actions
6-12 months out	Pay off personal loans, improve credit score, stabilize employment
3-6 months out	Close/reduce credit cards, reduce discretionary spending, start saving genuine savings (not borrowed or gifted)
1-3 months out	Engage mortgage broker, get pre-approval, avoid applying for any credit
Application time	Provide complete documentation, don't make major financial changes during assessment

Frequently Asked Questions

Does having a HECS debt really impact borrowing capacity that much?

Yes. HECS repayments are calculated as a percentage of your income and kick in at relatively low income levels ($51,550 in 2024-25). For a $100,000 earner, this can reduce borrowing capacity by approximately $84,000. However, you can't "pay off" HECS early to improve borrowing power in most cases—the money would be better used as a deposit or to clear other debts.

Should I pay off my mortgage or keep savings for a bigger deposit?

It depends. A larger deposit reduces your LVR (loan-to-value ratio) and may help you avoid LMI (lenders mortgage insurance), but clearing high-interest debt (credit cards, personal loans) typically increases borrowing capacity more effectively. Run the numbers with a broker.

How long does it take to increase borrowing power?

Some changes are immediate (closing credit cards), while others take months (improving credit score, establishing expense patterns). Plan for 3-6 months of preparation for best results.

Can I borrow more by using a non-bank lender?

Potentially. Non-bank lenders aren't bound by APRA's 3% buffer and may have different assessment criteria. However, their rates are often higher, so calculate whether the extra borrowing capacity is worth the increased interest costs over the loan term.

What if my income is variable (self-employed or commission-based)?

Lenders typically require 2 years of tax returns and may average or discount variable income components. Some specialist lenders cater to self-employed borrowers and may use alternative assessment methods (like bank statements rather than tax returns). A broker experienced with self-employed clients is crucial.

Will interest rate cuts increase my borrowing power?

Yes, but remember banks assess you at the rate plus the 3% buffer. A 0.25% rate cut doesn't move the needle dramatically because you're still being stress-tested 3% above the rate. However, lower rates do reduce the "new loan payments" component in the serviceability calculation.

Calculate Your Borrowing Power

Want to see how much you can borrow? Use our free Borrowing Power Calculator to get an instant estimate based on your income, expenses, and existing debts.

Check Your Borrowing Power →

The Bottom Line

Increasing your borrowing power isn't magic—it's mathematics. Banks follow clear formulas, and understanding those formulas lets you optimize your position. The most impactful actions are:

Close unused credit facilities (instant impact)
Pay off expensive debts like personal loans and car loans
Clean up discretionary spending for 3-6 months before applying
Use a skilled broker to find lenders with favorable assessment criteria
Consider timing—apply when income is stable and debt is minimized

Start planning 6-12 months before you intend to buy. Small changes compound: closing a $10,000 credit card, paying off a $5,000 personal loan, and reducing monthly expenses by $200 can collectively add $100,000+ to your borrowing capacity. That could be the difference between the property you want and the one you settle for.

Remember: borrowing capacity is not the same as what you should borrow. Just because a bank will lend you $800,000 doesn't mean that's comfortable for your lifestyle and goals. Always stress-test your own budget at rates 2-3% higher than today's rates to ensure you're truly comfortable with the repayments.