How Do Banks Calculate Borrowing Power in Australia? (2025 Guide)

​

​

​

​

​

​

​

​

​

​

​

​

​

Borrowing power is one of the most important numbers for Australian home buyers — and one of the most misunderstood. Every bank in Australia uses a different formula, different income rules, different expense assumptions and different stress-test rates. This is why two lenders can give you completely different borrowing limits, even when your income and financial situation are identical.

Understanding how banks calculate borrowing power is essential whether you're buying in Sydney, Melbourne, Brisbane, Perth, Adelaide or regional Australia. This guide explains the exact components lenders use in their calculations, what increases or decreases your capacity, and how Matcheroo AI helps Australians identify which lenders will assess them most favourably.

​

How Australian Banks Calculate Borrowing Power

​

Banks calculate borrowing power by estimating how much of your income is left over after all expenses and debts. This surplus income determines the maximum monthly repayment you can afford, which is then converted into a loan amount using the bank’s assessment interest rate.

​

The formula looks simple, but the way banks apply it is complex — and every lender applies the rules differently. Below are the exact elements used in the borrowing power calculation across Australia.

​

1. Income Assessment (The Foundation of Borrowing Power)

​

Banks begin with your gross income, but they don’t use 100% of everything you earn. Depending on the lender, they will apply different acceptance rates and “shading” to income types.

​

Income categories lenders assess include:

• Full-time salary

• Part-time salary

• Casual income

• Bonus income

• Commission income

• Overtime

• Allowances

• Self-employed income

• Rental income

• Government payments (case-by-case)

​

Each income type is treated differently. For example:

• Casual income may be accepted at 50–80% depending on the lender

• Bonuses and commission are averaged over 6–24 months

• Overtime may be capped or heavily discounted

• Rental income may be shaded (e.g., only 70–80% counted)

​

This variation is why borrowing power differs between banks in NSW, VIC, QLD, WA and SA.

​

2. Household Expenses (HEM Benchmark + Declared Spending)

​

Banks apply the Higher of:

• Your declared monthly living expenses, OR

• The national HEM benchmark (Household Expenditure Measure)

​

HEM varies by:

• State (NSW, VIC, QLD, WA, SA)

• Household size

• Lifestyle category

• Number of dependants

​

If you’re buying in Sydney’s Eastern Suburbs, Melbourne’s Inner North, Brisbane’s bayside areas or Perth’s coastal suburbs, your living-cost benchmark may be higher due to postcode factors.

​

The higher the assumed expenses, the lower your borrowing power.

​

3. Existing Debts and Financial Commitments

​

Banks subtract all ongoing debts from your income before calculating borrowing power. This includes:

• Credit cards (assessed at full limit, not balance)

• Car loans

• Personal loans

• Buy Now Pay Later accounts

• HECS/HELP repayments

• Afterpay/Zip

• Child support

• Other mortgages

​

A single $10k–$20k credit card limit can reduce borrowing power by tens of thousands, especially in high-cost cities like Sydney and Melbourne.

​

4. Number of Dependants

​

Dependants significantly increase your assumed living expenses. Families in Australia often see a dramatic reduction in borrowing power due to HEM scaling as the number of dependants increases.

​

5. Debt-To-Income Ratio (DTI)

​

Most Australian banks now apply a DTI cap around 6:

• Income: $100,000

• Maximum total lending: ~$600,000

​

Some lenders are stricter, especially in NSW and Victoria. Others allow higher DTIs, which can increase borrowing power substantially.

​

6. Credit Score and Risk Profile

​

A borrower with a stronger credit score may receive:

• A lower assessment rate

• More favourable servicing

• Access to policies with higher borrowing power

Lower scores may trigger:

• Tighter lending rules

• Rate loading

• Reduced income acceptance

This affects buyers across Australia equally.

​

7. Assessment Interest Rate (The “Stress Test”)

​

Banks must test your repayment capacity using an artificially high rate, usually:

Actual rate + 3.00%

If the real rate is 5.8%, the assessment rate might be 8.8%–9.0%.

​

The higher this rate, the lower your borrowing capacity — especially in expensive markets like Sydney and Melbourne.

​

8. Loan Term and Repayment Type

​

• Longer terms = higher borrowing power

• Shorter terms = lower borrowing power

• Interest-only loans may reduce borrowing capacity depending on the lender

• Principal & interest terms usually provide higher borrowing limits

​

This varies across lenders in NSW, VIC, QLD, WA and SA.

​

9. Income Stability and Employment History

​

Banks look at:

• Job tenure

• Industry

• Contract type

• Consistency of income

• Probation status

Recent job changes or casual positions can reduce borrowing power unless matched with the right lender.

​

Why Borrowing Power Differs Between Banks

​

Every lender in Australia uses its own internal calculator. That includes:

​

• Different shading rules

• Different expense assumptions

• Different HECS formulas

• Different rental income acceptance

• Different treatment of casual and variable income

• Different DTI limits

​

This is why a borrower in NSW or Victoria might receive a borrowing estimate that differs by $50k, $100k or even $200k between lenders.

Borrowing power variation is normal — but most Australians never see the differences.

​

How Matcheroo AI Helps Australians Find Higher Borrowing Power

​

Matcheroo AI analyses how multiple Australian lenders assess your profile, identifying where you may be able to borrow more based on:

• Income type

• Family structure

• Existing debts

• Location

• Expenses

• Employment type

• HECS

• Credit profile

​

Instead of relying on a single bank’s calculator, Matcheroo AI instantly highlights lenders with:

• Higher DTI limits

• Lower income shading

• More favourable treatment of casual/overtime/bonus income

• Different HECS assumptions

• Better rental income acceptance

• More flexible expense calculations

​

This means Australians may discover significantly higher borrowing capacity simply by choosing the lender whose policies best match their situation.

​

How Australians Can Increase Their Borrowing Power

​

Strategies that realistically increase borrowing capacity include:

​

• Reducing or closing credit card limits

• Paying down personal or car loans

• Improving savings history

• Reducing discretionary expenses

• Waiting until probation ends

• Increasing income stability

• Removing BNPL services

• Using Matcheroo AI to compare lender calculators

​

These steps directly influence how banks assess borrowing power in 2025.

​

Summary: How Banks Calculate Borrowing Power in Australia

​

Australian banks calculate borrowing power using a mix of income assessment, expenses, debts, dependants, credit history, DTI caps and stress-test interest rates. Because every lender applies these rules differently, borrowing power varies significantly across the major banks.

Borrowers across Sydney, Melbourne, Brisbane, Perth, Adelaide and regional areas can benefit from comparing multiple lenders — and Matcheroo AI makes that process far easier by showing where individual borrowers are likely to achieve the highest borrowing estimate.