The Borrowing Power Formula: Income, HEM, Buffers and Debts
ADS Team
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July 27, 2026
27 days ago
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In short: Lenders calculate borrowing power as net monthly income, minus assessed living expenses, minus existing commitments, leaving a surplus. That surplus is then converted into a loan amount using an assessment rate about 3 percentage points above the actual rate. Because the assessment rate in 2026 is near 9.25–9.5%, your capacity is roughly 25% lower than the rate you will actually pay would suggest.
Key takeaways
- Living expenses are assessed at the higher of your declared spending and the HEM benchmark.
- Credit card limits are counted in full, whether or not you owe anything.
- From February 2026 APRA caps lending at DTI ≥ 6 to 20% of a lender's new lending.
- Capacity can vary by $200,000 or more between lenders on identical inputs.
The four steps
- Net income. After-tax salary, plus other income shaded by lender policy — rental income commonly at 70–80%, overtime and bonuses often at 80%.
- Less living expenses. The higher of your declared expenses and the Household Expenditure Measure benchmark for your household size, income and location.
- Less commitments. Other loan repayments, HECS-HELP, novated leases, BNPL, and 3–3.8% of every credit card limit each month.
- Convert the surplus. The remaining surplus is run through the repayment formula at the assessment rate to give a maximum loan.
A worked example
A couple, no children, combined gross $180,000, no other debts, one credit card with a $15,000 limit.
- Net monthly income: approximately $11,200
- Less HEM-assessed living expenses: approximately $4,200
- Less credit card commitment (3.8% of $15,000): $570
- Surplus available: approximately $6,430
Lenders retain a portion of that surplus as a further buffer. Assuming about $5,600 is applied to the loan at an assessment rate of 9.5% over 30 years, the maximum loan is roughly $666,000.
Cancel the credit card and the $570 commitment disappears, lifting capacity by around $60,000 — for a card that may carry no balance at all.
Why do lenders disagree so much?
Every lender builds its own calculator within APRA's requirements, and they differ on:
- How much overtime, bonus, commission and rental income they accept
- How they treat HECS-HELP — some ignore it when the balance is nearly repaid
- The percentage applied to credit card limits
- Whether negative gearing benefits are added back
These differences compound. Two lenders can land more than $200,000 apart on the same application, which is the main practical reason borrowers use a broker.
Frequently asked questions
What is HEM?
The Household Expenditure Measure, a benchmark of typical household spending derived from ABS survey data and scaled by income, location and household composition. Lenders use the higher of HEM and your declared expenses, so understating your spending does not increase your capacity.
Does HECS-HELP really affect my borrowing power?
Yes. Compulsory repayments are treated as a commitment reducing surplus income. Some lenders disregard the debt when only a year or two of repayments remain, so it is worth asking.
How can I increase my borrowing power quickly?
Reduce or cancel unused credit limits, clear small consumer debts, avoid new BNPL accounts, and demonstrate three to six months of controlled spending. Extending the loan term also raises capacity, at the cost of more total interest.
Related reading
- Stress-Testing Your Own Budget at +3%
- Why Home Loan Applications Get Declined: The Top 12 Reasons
- Offset Account Maths: Dollar-for-Dollar Savings Modelled
Sources
- Prudential Practice Guide APG 223 Residential Mortgage Lending — APRA
- Household Expenditure Measure methodology — Melbourne Institute
Rates checked as at 2 August 2026. Interest rates, lender policies and government schemes change frequently. Figures in this article are illustrative and were accurate at the date shown.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.
Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.
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