How to Increase Your Borrowing Capacity: What Lenders Actually Look At

You've done the sums. Found the suburb. Worked out roughly what you need. Then the bank comes back with a number that's $80,000 short and you're left wondering what went wrong.

Borrowing capacity is one of those areas where small changes can make a surprisingly large difference. Close the right credit card, pay off the right debt, adjust how your income is structured, and suddenly the gap shrinks.

This guide explains what lenders actually assess, which factors you can influence, and what's roughly worth your time.

What lenders are actually measuring

Banks don't just look at your income and give you a multiple of it. The assessment is more nuanced than that, and it varies between lenders. But the core calculation looks something like this:

Borrowing capacity = (Income available for debt servicing) divided by (monthly repayment required per $1 borrowed)

The "income available for debt servicing" is your gross income minus taxes, minus assessed living expenses, minus existing debt repayments. What's left is the pool the bank uses to service a new mortgage.

Everything on the expenses side of that equation is something you might be able to reduce.

The seven things lenders assess

1. Gross income

This is the most obvious lever. More income means more serviceability. But lenders don't always use 100% of every income type. Standard inclusions:

• Base salary: 100% included
• Regular overtime: Usually 80%, sometimes less if it looks irregular
• Bonuses: Often only 50-80%, averaged over 2 years
• Casual employment: Most lenders want 12 months of continuous casual work; some require 2 years
• Self-employment income: Typically averaged over the last 2 tax returns
• Rental income: Usually 70-80% of gross rent (to allow for vacancies and expenses)
• Investment dividends: Often averaged and sometimes discounted

If your income includes anything besides base salary, check how your target lender treats it. It varies a lot.

2. Living expenses (HEM vs actual)

Banks assess your living costs using whichever is higher: your declared expenses, or a benchmark called the Household Expenditure Measure (HEM).

HEM is set by the Melbourne Institute and varies based on your location, income level, and number of dependants. For a single person earning around $80,000, HEM is roughly $2,100 to $2,400 per month. For a family of four on a combined income of $150,000, it's closer to $3,500 to $4,000.

Here's the frustrating bit: if your actual spending is below HEM, the bank uses HEM anyway. You can't argue your way below the benchmark. This means cutting lattes won't do much for borrowing capacity. Cutting actual liabilities will.

3. Existing debts and liabilities

This is where a lot of people unknowingly hurt themselves. Lenders include:

• Car loans
• Personal loans
• Buy now pay later accounts (Afterpay, Zip, etc.)
• Credit card limits (not balances, limits)
• HECS/HELP debt (via your mandatory repayment rate)
• Existing investment property mortgages

The credit card point catches people off guard. Banks typically assess around 3% of your total credit limit per month as a notional liability, regardless of whether you owe a cent. A $15,000 credit card limit = roughly $450 per month assumed outgoing = can reduce your borrowing capacity by $50,000 to $80,000.

4. HECS/HELP debt

Worth calling out separately because it surprises people. HECS repayments are compulsory once you earn above the repayment threshold, and lenders treat them as a real ongoing expense.

The 2026-27 repayment threshold is $69,528 (from 1 July 2026). The repayment system also changed from 1 July 2025: Australia moved from a flat percentage to a marginal rate system. You pay 1.0% of your income above the threshold, stepping up to 2.0% above $129,717, 2.5% above $151,612, and so on, capped at 10% of your total income.

At $80,000 income, your compulsory HECS repayment works out to roughly $1,571 per year ($131 per month). That reduces the income pool available for mortgage servicing, which can trim $15,000 to $25,000 off your borrowing capacity depending on the lender.

Also worth noting: the government applied a 20% reduction to all HELP balances before 1 June 2025. So a HELP balance that was $50,000 before the change would now be around $40,000. Your compulsory repayment is calculated on the current reduced balance.

Use the HECS Repayment Calculator to see your annual compulsory repayment at different income levels.

5. Number of dependants

Each dependant increases the HEM benchmark the lender applies. A couple with no kids might have HEM applied at one level; the same couple with two children has a meaningfully higher assumed living cost. Not much you can do here, but it's useful context if you're wondering why two people with similar incomes get different assessments.

6. Employment type and stability

Lenders like stability. Permanent full-time employment is the gold standard. Casual, contract, and self-employed borrowers face more scrutiny and sometimes have income discounted. If you're planning to buy soon, holding off on changing jobs or going freelance is worth considering.

Most lenders want to see at least 3 months in a new role (some require 6 months) before they'll include the income. If you recently changed jobs, some lenders will accept an offer letter plus payslips, but others want a full track record.

7. The stress test rate

Since 2021, APRA has required lenders to stress-test loan applications at the actual interest rate plus 3 percentage points. So if the home loan rate is 6.2%, the bank tests whether you can afford repayments at 9.2%.

This is significant. It means even if you're comfortable at current rates, the bank needs to see you're still fine if rates rise substantially. It's one of the main reasons borrowing capacity has come down from the peaks of 2021.

What you can actually change

Here's the practical bit. Some things are fixed (how many kids you have, whether you're casual or permanent). These are the levers worth pulling:

Close unused credit cards

This is usually the fastest win. If you have a $10,000 card you never use, closing it removes around $300 per month from your assessed liabilities. That can add $40,000 to $65,000 to your borrowing capacity depending on your income and the lender.

If you have multiple cards, close the highest-limit ones first. Pay off the balance, cancel the card, and get written confirmation the account is closed before applying.

One thing to watch: closing cards can temporarily dip your credit score, particularly if you've had them for a long time. Check your credit file first (free at Equifax, Illion, or Experian), and avoid closing cards in the 3-6 months before applying if your score is already borderline.

Pay down personal loans and car finance

The key here isn't just reducing the balance, it's reducing the ongoing monthly repayment obligation. If you can pay off a personal loan entirely, that repayment disappears from the lender's assessment entirely.

Partial paydowns help too, but closing the account is cleaner. Lenders verify the account balance at application time, so there's no need to do this months in advance. A week before applying is fine.

Cancel BNPL accounts

Buy now pay later services like Afterpay and Zip show up on your bank statements and sometimes on your credit file. Lenders are increasingly treating BNPL limits as liabilities, similar to credit cards. If you have BNPL accounts you don't use, close them.

Consolidate debts before applying

If you have multiple small debts, consolidating them into a single lower-rate loan can reduce the total monthly repayment obligation the lender sees. It doesn't eliminate the debt, but it can improve serviceability if the new repayment is lower than the combined old ones.

Be careful here: don't take on new debt just before applying, as it creates a new liability and a hard credit enquiry.

Get your income documented properly

If you receive bonuses, overtime, or income from a side business, make sure it's properly documented. Tax returns, payslips, and a letter from your employer confirming the bonus is ongoing can all help the lender include more of your income in the assessment.

Self-employed borrowers with two full years of tax returns showing consistent or growing income are in a much better position than someone with one good year. If you're six months away from your second strong year, it might be worth waiting.

Apply with the right lender for your situation

This is underrated. Different lenders calculate HEM differently, treat HECS differently, and have different rules about overtime and bonus income. One lender might offer you $650,000; another might offer $720,000 with exactly the same application.

This is one of the genuine benefits of using a mortgage broker. They know which lenders are likely to return the strongest result for your specific profile.

How much difference does each change make?

These are rough estimates for a single applicant earning $100,000 gross per year, based on typical lender assessments. Your actual result will vary.

The biggest wins are usually from closing credit cards and paying off personal loans. The numbers above show why: removing a $500/month repayment can translate to over $100,000 in additional borrowing capacity because that income is now available to service a mortgage instead.

What doesn't help as much as people think

Cutting everyday spending. If your spending is already at or below HEM, the bank is using HEM anyway. Eating at home more often doesn't change the bank's assessment.

Saving a bigger deposit. Your deposit size affects the loan-to-value ratio and whether you pay LMI, but it doesn't increase the serviceability pool the bank uses to assess repayments. Borrowing capacity is determined by your income versus your expenses, not by how much you've saved.

Switching to interest-only on an investment loan. Sometimes people think this helps because the monthly repayment is lower. It can improve serviceability slightly, but lenders are aware of the strategy and some apply principal-and-interest repayment rates in their assessment regardless.

Before you apply: a quick checklist

• Close any credit cards you don't regularly use
• Pay off and close personal loans where possible
• Cancel unused BNPL accounts
• Check your credit file for errors (free via Equifax, Experian, or Illion)
• Don't apply for any new credit in the 3 months before applying
• Don't change jobs in the 3 months before applying if you can avoid it
• Have 3 months of bank statements showing clean, consistent income
• If you're self-employed, have your last 2 years of tax returns lodged

Use the Mortgage Repayment Calculator to check what repayments look like once you've worked out your target loan amount. Then use the Borrowing Capacity Calculator to see where you land under different scenarios.