Borrowing power calculator

How borrowing power is worked out

A lender assesses whether you can service a loan, not whether you can afford a house. The test is a monthly cash flow calculation and it runs in the same order every time.

1. 1

   Count the income

   Salary, and usually a shaded portion of anything variable. Overtime and bonuses are often counted at 80%, and rental income frequently at 80% too, because lenders assume vacancy and costs.

2. 2

   Subtract living expenses

   Your declared expenses, or a benchmark figure for a household of your size and income, whichever is higher. You do not get to choose the lower one.

3. 3

   Subtract existing commitments

   Car loans, personal loans, buy-now-pay-later, HECS, and a monthly assessment on every credit card limit whether or not you owe anything on it.

4. 4

   Test the surplus at a buffered rate

   Whatever is left is run through the repayment formula backwards at the loan rate plus a buffer, over the loan term. That gives the maximum loan.

The calculator above runs exactly this sequence, and shows the surplus it arrived at so you can sanity check it against your own bank statements.

The serviceability buffer, and why you are tested at a higher rate

Lenders do not assess you at the rate you will pay. They add a buffer on top, and APRA expects that buffer to be around three percentage points. So a loan priced at 6% is assessed as though it were 9%.

The effect on your borrowing power is severe. Three points of buffer cuts the maximum loan by roughly a quarter compared with an unbuffered assessment, which is why the number you get here is lower than a simple affordability sum would suggest.

The buffer exists so that a rate rise does not immediately put borrowers into difficulty. It is a reasonable rule that has an unreasonable side effect: existing borrowers who could comfortably meet a cheaper loan sometimes cannot pass the test to move to one.

How lenders count your living expenses

You declare your living expenses and the lender compares them against a benchmark, most commonly the Household Expenditure Measure. The assessment uses whichever is higher, so understating them achieves nothing.

The categories are more detailed than people expect. Groceries, utilities, transport, insurance, medical, childcare, education, recreation, and subscriptions are all itemised, and the lender will read three months of statements to check.

Where it gets frustrating is one-off spending. A wedding, a holiday or a house move in the assessment window can lift your apparent monthly expenses for months afterwards. If your last quarter was unusual, say so up front and be ready to evidence it.

Genuine, sustained reductions do help. Three clean months of statements before you apply is worth more to your borrowing power than almost anything else you can control.

Credit cards, HECS and other commitments

Credit card limits are assessed as though they were fully drawn. Most lenders count between 2.5% and 3.8% of the limit as a monthly repayment, regardless of the balance. An unused $20,000 card can therefore cost you somewhere between $60,000 and $95,000 of borrowing power, depending on which lender is assessing it.

Cancelling a card you do not use is the fastest single improvement available to most applicants. Reducing a limit works too, and it is quicker than closing the account.

HECS is counted as a commitment while a balance remains, based on the compulsory repayment your income triggers. Buy-now-pay-later accounts show up on statements and are treated as commitments by most lenders now, even where the balance is small.

Car and personal loans are counted at the actual repayment. Paying one out shortly before applying helps, but only if the money did not come from savings the lender is counting as your deposit.

Why two lenders give you two different numbers

The same file put to two lenders regularly comes back with maximum loans more than $150,000 apart. Nothing about you changed. What changed is the policy applied to you.

• How much of your overtime, bonus or commission income is counted
• Whether rental income is shaded at 80%, or at 90% for some lenders
• How negative gearing is treated in the assessment
• Whether HECS is included when the balance is small and nearly repaid
• The benchmark expense floor applied to your household size
• The buffer used on the assessment rate, and whether a lower one applies to refinances
• How self-employed income is averaged, and over how many years

None of this is published in a way you can compare from the outside. It is the actual value of a broker with a full panel: not finding a rate a tenth of a point lower, but knowing which lender's policy your particular income shape fits.

What this calculator does not do

It is a serviceability estimate. It does not check your deposit, your credit file, your employment history or the property itself, and every one of those can cap a loan below the figure shown.

• Deposit and loan-to-value ratio, including whether lenders mortgage insurance applies
• Credit history, defaults and recent enquiries
• How long you have been in your job, and whether you are on probation
• Self-employed income, which needs two years of returns at most lenders
• The property type, which some lenders restrict by postcode, size or use
• Genuine savings requirements, where part of the deposit must be saved rather than gifted

It is also not a pre-approval. A pre-approval means a lender has assessed your documents and put a number in writing, and that is what an agent takes seriously when you make an offer.