How Much Can I Borrow? A Complete Australian Guide

Whether you are buying your first home, upgrading to a larger property or financing a car, the first question on most people's minds is: how much can I actually borrow? The answer depends on several factors that lenders weigh up before making an offer. This guide breaks down the key components so you can estimate your borrowing capacity before you even speak to a lender.

Income Multiples: The Quick Estimate

The simplest way to estimate your borrowing capacity is the income multiple method. For home loans, most Australian banks will lend between five and seven times your gross annual household income. A couple earning a combined $150,000 per year could potentially borrow between $750,000 and $1,050,000.

For car loans, the multiple is typically lower. Lenders generally cap vehicle finance at around one to two times your annual income, although this varies significantly by lender and your overall financial position. A person earning $80,000 might be approved for a car loan of $40,000 to $80,000, provided they meet other criteria.

However, income multiples are only a starting point. Your real borrowing capacity depends on a detailed assessment that considers your expenses, existing debts and the lender's own policies.

How Lenders Actually Assess Your Capacity

When you apply for a loan, the lender does not just look at your income. They run a detailed serviceability calculation that includes:

• Gross income: Your base salary, plus any regular overtime, bonuses, commissions and rental income. Lenders typically "shade" variable income, counting only 80% of overtime or 60% of bonus income to be conservative.
• Existing commitments: Current home loan repayments, personal loans, car loans, HECS-HELP repayments and minimum credit card repayments (calculated at 3% of the total limit, even if the balance is zero).
• Living expenses: The higher of your declared living expenses or the Household Expenditure Measure (HEM) benchmark for your family size and income bracket.
• Serviceability buffer: APRA requires banks to add at least 3 percentage points to the current rate. If the product rate is 6.00% p.a., the lender assesses your ability to repay at 9.00% p.a.

Understanding the Serviceability Buffer

The serviceability buffer is one of the most significant factors limiting borrowing power in the current market. Introduced by APRA (the Australian Prudential Regulation Authority), the buffer ensures borrowers can still afford repayments if interest rates rise.

In practical terms, a 3% buffer on a 6.00% rate means lenders assess you at 9.00% p.a. On a $600,000 loan over 30 years, the actual monthly repayment would be about $3,597, but the lender needs to be satisfied you could afford $4,829 per month. That difference of over $1,200 directly reduces the maximum amount you can borrow.

Non-bank lenders are not regulated by APRA and may use a smaller buffer (often 2% or even 1%), which can result in higher borrowing capacity. However, their interest rates are usually slightly higher, so it is important to weigh the trade-off.

The HEM Benchmark and Living Expenses

The Household Expenditure Measure (HEM) is a statistical benchmark developed by the Melbourne Institute. It estimates the median spend on absolute basics (food, transport, utilities) plus the 25th percentile of discretionary spending for households of different sizes and incomes.

Since the Banking Royal Commission in 2018, lenders are required to take reasonable steps to verify your actual living expenses. They do this by analysing your bank statements (often using automated tools like Comprehensive Credit Reporting data or bank statement analysis software). The lender uses whichever figure is higher: your actual declared expenses or the HEM benchmark.

If you want to maximise borrowing power, it helps to reduce discretionary spending in the three to six months before applying. Items like food delivery subscriptions, gambling transactions and excessive entertainment spending can all raise red flags.

Tips to Improve Your Borrowing Power

1. Close unused credit cards: Every dollar of credit limit reduces your capacity, even with a zero balance. A $10,000 credit card limit could reduce your home loan borrowing power by $30,000 to $50,000.
2. Pay down existing debts: Clearing a $500/month car loan could increase your home loan capacity by roughly $80,000 to $100,000.
3. Clean up your spending: Reduce discretionary spending, particularly on "buy now, pay later" services, gambling and excessive subscriptions in the months before applying.
4. Consider a longer loan term: Extending from 25 to 30 years reduces the assessed monthly repayment, increasing your capacity (though you pay more interest overall).
5. Add a co-borrower: A second income significantly increases borrowing capacity, but both borrowers are jointly liable for the full debt.
6. Save a larger deposit: While this does not directly increase the amount a lender will approve, a larger deposit reduces the loan amount needed and can unlock better rates, especially below 80% LVR where you avoid Lenders Mortgage Insurance.
7. Use a broker: Different lenders have different policies and serviceability calculators. A broker can model your scenario across multiple lenders to find the one that offers the highest borrowing capacity for your situation.

Home Loans vs Car Loans: Key Differences

Borrowing capacity works differently for home loans and car loans. Home loans are assessed more conservatively because of the larger amounts and longer terms involved. Car loan assessments are simpler but still consider your income, expenses and credit history.

For car loans, lenders also consider the vehicle's age and value. Most mainstream lenders cap the vehicle age at 10 to 12 years at the end of the loan term. Specialist lenders may be more flexible but charge higher rates. The loan-to-value ratio for car loans is typically capped at 100% to 120% of the vehicle's value (the extra allowing for on-road costs).