How Do Lenders Calculate How Much You Can Borrow? A Plain-English 2026 Guide

By Andrew Paterson

You punch your income into a bank’s borrowing power calculator and it spits out a number. No working. No explanation. Just a figure that somehow feels too low.

If you want to understand how lenders calculate how much you can borrow, this walks you through the actual maths.

We’ll build a full worked example with real dollar figures, cover the two regulatory walls you have to clear in 2026 and explain why the same borrower gets different numbers from different lenders.

Figures as at 4 August 2026. Rates and settings move often, so treat these as indicative.

The short version: it’s a surplus test, not an income test

Lenders don’t lend against your income. They lend against your surplus.

The core mechanic looks like this:

1. Start with your gross income.
2. Convert it to after-tax (take-home) income.
3. Subtract your living expenses (the higher of what you declare or the HEM benchmark).
4. Subtract your existing debts and credit card limits.
5. Whatever is left over is your monthly surplus.
6. They then test that surplus against a new loan repayment calculated at your actual rate plus a 3% buffer.

That last step is what surprises most people. Your loan is stress-tested at a rate much higher than the one you’ll actually pay.

The APRA assessment rate buffer: 3%, not 2.5%

You may have read older content quoting a 2.5% buffer against 4% rates. That’s out of date.

APRA lifted the serviceability buffer to 3.0 percentage points back in October 2021 and reaffirmed it through 2025 into 2026.

So lenders test your repayments at your actual rate plus 3%.

With owner-occupier variable rates sitting around 6.0% to 6.5% right now, that means most borrowers are assessed near 9.0% to 9.5%.

Here’s what that does to a repayment on a $600,000 loan over 30 years:

Rate used	Monthly repayment
Actual rate (6.25%)	~$3,694
Assessment rate (9.25%)	~$4,936

The lender needs your surplus to cover the $4,936, not the $3,694. That gap is why calculators come back lower than you expect.

What HEM is and why it sets a floor on your expenses

HEM stands for Household Expenditure Measure. It’s a quarterly benchmark of what a household typically spends on living costs.

Lenders use the higher of your declared living expenses or the HEM figure for your situation.

A few things worth knowing:

• HEM scales with your income band, household size and location.
• More dependants means a higher HEM figure and less surplus.
• HEM excludes rent and mortgage repayments. Those sit separately in the assessment.
• The tables are licensed, not public, so you can’t look up your exact number.

If you tell a lender you spend $2,000 a month but HEM for your household says $4,500, they use $4,500. You can’t undercut the benchmark by declaring unrealistically low expenses.

How existing debts and credit card limits hit your borrowing power

This is where a lot of people accidentally shrink their own capacity. We’ve written in more detail about how your credit card limit affects borrowing power, but here’s the short version.

Personal and car loans: lenders count the actual monthly repayment.

Credit cards: lenders count roughly 3% of your total limit per month, regardless of your balance. Some go as high as 3.8%.

Read that again. It’s the limit, not the balance.

A $20,000 credit card limit you never touch is still modelled as about $600 a month in commitments. That alone can cut your borrowing power by $50,000 to $80,000.

HECS/HELP: your compulsory repayment reduces your assessed income. If you’re within a year or two of paying it off, the timing can matter for your capacity.

The second wall: the 6x debt-to-income cap

Here’s the piece most 2026 guides still miss. There are now two ceilings, not one.

From 1 February 2026, APRA limits banks to writing no more than 20% of new mortgage lending at a debt-to-income ratio of 6 times gross income or higher. It applies separately to owner-occupier and investor lending.

So your genuine borrowing estimate is the lower of:

1. The buffered serviceability result (the surplus test above), and
2. The 6x DTI limit.

For higher earners with low expenses and no debts, DTI is often the binding constraint. The serviceability test might say yes, but 6x gross income caps you first.

One nuance worth knowing: non-bank lenders aren’t subject to APRA’s 20% DTI cap. The 3% buffer expectation and higher rates still apply through regulated lenders, but the DTI wall is a bank rule. That can matter if you hit the cap.

A full worked example, start to finish

Let’s run real numbers. Almost no calculator shows you this end to end.

Take a Geelong couple with two dependent kids:

• Combined gross income: $150,000
• Combined after-tax income: roughly $114,000 a year, or about $9,500 a month
• Car loan: $550 a month actual repayment
• Credit card limit: $15,000 (assessed at 3%, so ~$450 a month)
• HEM for a couple with two dependants on this income: roughly $5,200 a month

Now we work through it:

Step	Monthly figure
Net income	$9,500
Less HEM (higher of declared or benchmark)	-$5,200
Less car loan	-$550
Less credit card (3% of $15,000)	-$450
Surplus available for a mortgage	$3,300

That $3,300 monthly surplus gets tested at the assessment rate of about 9.25% over 30 years.

Reverse the repayment maths and $3,300 a month at 9.25% supports a loan of roughly $401,000.

Now the DTI cross-check. $150,000 gross income times 6 is $900,000. The serviceability result of $401,000 is well under that, so serviceability is the binding wall here, not DTI.

Notice what happened. A couple on $150,000 borrows around $401,000, not the $700,000-plus they might have guessed from the income alone. If you want to see how this plays out for other income levels, we’ve covered how much you need to earn to buy a home in 2026 in more detail.

Now watch the credit card lever. If that couple closed the $15,000 card, they’d free up the $450 a month. That extra surplus supports roughly another $55,000 in borrowing capacity. From doing nothing except cancelling a card they weren’t using.

Why different lenders give you different numbers

Two lenders can look at the exact same borrower and land $80,000 apart. This is the part single-bank calculators can’t tell you.

The levers that differ between lenders:

• HEM variant: different lenders use different versions of the benchmark tables.
• Floor rates: some lenders won’t assess below a set minimum rate even if actual plus buffer is lower.
• Income shading: a $20,000 bonus might be counted at $10,000 with one lender and $16,000 with another. Overtime, commission and rental income all get shaded differently.
• Rental income treatment: lenders typically count 70% to 80% of rent, and the exact figure varies.

This is the whole reason a broker’s view beats a single bank’s number. We can see which lender’s policy suits your specific income mix. Self-employed with lumpy income? One lender might crush you while another reads your situation fairly. It’s part of why more than 80% of buyers now turn to a broker rather than walking into a single branch.

How much deposit do you actually need?

Borrowing capacity is only half the picture. You also need the deposit and upfront costs.

On a Geelong median house around $871,000 (postcode 3220), a full 20% deposit is roughly $174,000. That’s a big number.

But there are ways in with less:

• The Australian Government 5% Deposit Scheme (formerly the First Home Guarantee) now covers Geelong with a property price cap of $950,000. Eligible first home buyers can enter with a 5% deposit and no LMI, which is worth understanding if you’re weighing up how lenders mortgage insurance works against going down this path. From 1 October 2025 there are no income caps and unlimited places, a shift we covered when it happened in our piece on how the 5% Deposit Scheme has already helped over 300,000 Aussies buy a first home.
• Victorian first home buyers pay $0 stamp duty up to $600,000, with a sliding concession from $600,001 to $750,000. A full exemption on a $600,000 purchase saves around $31,000.
• The Victorian First Home Owner Grant of $10,000 is available for eligible buyers of newly built homes.

So the deposit hurdle and the borrowing capacity work together. A scheme place can change both what you need up front and how quickly you can move.

Why did my borrowing power drop in 2026?

If you were pre-approved a couple of years ago and your number has shrunk, here’s why. It’s worth checking whether your existing pre-approval is now out of date.

• The RBA cash rate is 4.35% as at early August 2026, after three hikes this year following three cuts in 2025, the most recent of which we detailed when it happened in our coverage of the cash rate increasing for the third time this year.
• Higher actual rates mean higher assessment rates once the 3% buffer is added.
• The 6x DTI cap from February 2026 added a second constraint that didn’t exist before.

The next RBA decision is 11 August 2026. All four big banks expect a hold, with markets pricing around an 82% chance. Worth checking the RBA on the day you read this, because these figures move.

The takeaway: borrowing capacity isn’t a mystery once you see the mechanics. It’s income, minus expenses, minus debts, stress-tested at a buffered rate, then checked against the DTI cap. Get across your own numbers, then let a broker show you where the lenders differ.

Important disclaimers

This is general information only. It is not financial, credit or tax advice, and it is not a Credit Guide under the National Consumer Credit Protection Act 2009 (Cth). Seek advice specific to your circumstances.

Borrowing capacity is not a single formula. Each lender has its own calculator, credit policy, HEM variant, floor rate and income-shading rules, so the figures here are indicative estimates only, not an offer or pre-approval.

Interest rates and the RBA cash rate change frequently. Figures are stated as at 4 August 2026 and should be verified before you rely on them.

Frequently asked questions

How much can I borrow on an $80,000 salary?

It depends on your expenses, debts and household size, not just the salary. As a rough single-income guide with no dependants and no debts, $80,000 gross might support somewhere around $400,000 to $470,000 once assessed at an approximately 9.25% buffered rate. Add a car loan, a credit card limit or dependants and that figure drops. The only way to get an accurate number is to run your full situation through the right lender’s policy.

Does my car loan affect my borrowing power?

Yes. Lenders count the actual monthly repayment on your car loan as an ongoing commitment, which reduces your surplus. A $550 a month car repayment can cut your borrowing capacity by roughly $65,000 to $70,000. Paying it out before you apply can meaningfully lift what you can borrow.

Does a credit card I never use affect my home loan?

Yes, and this catches a lot of people. Lenders assess credit cards on the total limit, not the balance, at around 3% of the limit per month. A $20,000 limit sitting at zero is still modelled as about $600 a month in commitments, which can reduce your borrowing power by $50,000 to $80,000. Closing or reducing unused cards before applying often helps.

Do dependants reduce my borrowing capacity?

Yes. Each dependant increases the HEM living-expenses benchmark the lender applies, which lowers your monthly surplus. The exact impact depends on the lender’s HEM tables and your income band, but more dependants consistently means a lower assessed capacity.

Why did my borrowing power drop in 2026?

Three things. The RBA cash rate rose to 4.35% after three hikes in 2026, higher actual rates push the buffered assessment rate up toward 9.0% to 9.5%, and APRA’s new 6x debt-to-income cap from 1 February 2026 added a second constraint. Together they mean the same income supports a smaller loan than it did a year or two ago.

What is the APRA assessment rate buffer?

It’s the margin lenders add to your actual interest rate when testing whether you can afford repayments. Since October 2021 the buffer has been 3 percentage points, reaffirmed through 2025 into 2026. So if your actual rate is 6.25%, the lender assesses your repayments as if the rate were about 9.25%.