Many borrowers are surprised when their home loan borrowing power is lower than expected.
They may have a good income, stable employment and a strong repayment history, but still find that a lender is not prepared to lend as much as they hoped.
That is because borrowing capacity is affected by a range of factors. These factors can reduce borrowing capacity. A borrowing power calculator can help you estimate your position, and if you’re asking “how much can i borrow”, it can provide a quick guide; but the final result depends on how a lender assesses your income, expenses, debts and overall risk.
If you’re wondering what reduces borrowing power, here are seven common things to consider.
Credit card limits
Credit card limits borrowing power more than many borrowers realise.
A lender may assess the limit of the card, not just the balance owing. That means a $20,000 credit card limit can reduce borrowing power even if the balance is paid off each month.
If you do not need a high limit, reducing it before applying may improve borrowing power and overall borrowing capacity.
Personal loans and car loans
Fixed repayments on personal loans, car loans and other consumer debts can reduce home loan serviceability.
Even a relatively small loan can make a noticeable difference because the lender must allow for the ongoing repayment. Paying down or clearing personal debts before applying may improve your position.
This does not mean every debt should automatically be closed. The right approach depends on your full situation, cash position and loan plans.
Living expenses
Lenders assess whether your income can support your proposed loan repayments after allowing for living expenses.
You may enter your actual expenses, but lenders can compare them against internal benchmarks. If the benchmark is higher than your declared amount, the lender may use the higher figure.
Before applying, it can help to review spending patterns, subscriptions, discretionary expenses and regular commitments.
Dependants
Dependants can affect borrowing power because lenders allow for the cost of supporting a household.
This is not a negative reflection on the borrower. It is simply part of the lender’s affordability assessment. The number of dependants, household income and overall living costs can all affect the result.
Income type
Not all income is treated the same way.
Base salary is often simpler to assess than overtime, bonuses, commissions, casual income, contract income or self-employed income. Some lenders may only use part of variable income, or require a history before including it.
For self-employed borrowers, income assessment can vary significantly between lenders. Tax returns, BAS, business financials, add-backs and trading history may all be considered differently.
Existing home loans
If you already have a home loan or investment loan, the lender will assess that commitment. Importantly, they may assess it at a higher rate than your actual current rate.
For investors, rental income is also commonly shaded. This means the lender may use only part of the rental income, while still applying buffers to the debt.
This can reduce borrowing power, especially for borrowers with multiple properties.
Lender policy
Sometimes the issue is not the borrower. It is the lender.
Different lenders have different policies, assessment rates and risk appetite. A borrower who does not fit one lender may still be suitable for another.
This is where a broker can help. Instead of submitting applications blindly, a mortgage broker borrowing capacity assessment can review the scenario and identify which lenders are more likely to assess the application favourably.
How to improve your borrowing power
Depending on your situation, possible steps may include:
- reducing unused credit card limits;
- paying down personal debts;
- reviewing expenses;
- increasing deposit or equity;
- choosing the right lender;
- preparing stronger income evidence;
- avoiding multiple applications too quickly.
These steps may help improve borrowing power over time. The key is to diagnose the issue before applying.
Final thought
If your borrowing power is lower than expected, it does not always mean your plans are impossible. It may mean the structure, timing, lender or supporting documents need to be reviewed.
A borrowing capacity calculator can give you a starting point. A proper lending review can help you understand what is driving the result.
Q&A
Question: Why does a high credit card limit reduce my borrowing power even if I clear the balance each month?
Short answer: Lenders often assess your credit card by its limit, not just the current balance. They assume you could draw up to the full limit and factor an ongoing repayment into your affordability. As a result, a $20,000 limit can reduce borrowing power even with a zero balance. If you don’t need the limit, reducing it before applying can improve borrowing capacity.
Question: Do I need to pay off my personal or car loan before applying for a home loan?
Short answer: Not always, but fixed repayments on personal and car loans directly reduce your serviceability, even if the loan is relatively small. Paying down or clearing these debts can improve borrowing power, but the best approach depends on your overall cash position and plans. Consider the trade-off between using cash to reduce debt versus reserving funds for your deposit, costs, or buffers.
Question: How do lenders treat living expenses and dependants in the assessment?
Short answer: Lenders check that your income can cover proposed home loan repayments after allowing for living costs. They’ll consider your declared expenses but may compare them to internal benchmarks and use the higher figure. Having dependants increases assessed household costs; it’s not a negative mark, just part of affordability testing based on your family size, income and overall living costs.
Question: Will all of my income be counted if I have overtime, bonuses, commissions, casual or self-employed income?
Short answer: Not necessarily. Base salary is usually simplest to include, while variable income (overtime, bonuses, commissions, casual or contract) may be used only in part and often requires a track record. For self-employed borrowers, assessment varies widely: lenders may review tax returns, BAS, business financials, add-backs and trading history differently, which can change the income they accept.
Question: Why can two lenders offer very different borrowing capacities, and where do calculators fit in?
Short answer: Lenders have different policies, assessment rates and risk appetites, so the same borrower can test very differently across lenders. For example, some apply higher assessment rates to your existing loans and “shade” rental income (use only part of it) while still buffering the debt, which reduces capacity. Online borrowing calculators give a quick guide but the final result depends on each lender’s detailed assessment of income, expenses, debts and overall risk. A mortgage broker can review your scenario and match you with lenders more likely to assess your application favourably.
