How do banks calculate borrowing power?

Australian banks calculate borrowing power by assessing your income, expenses, existing debts, and the number of dependents you have. They estimate your net income after tax, subtract your living expenses (using the higher of your declared expenses or the Household Expenditure Measure benchmark), subtract existing debt repayments, and then determine how much mortgage repayment you can afford. Banks then use an assessment rate (the actual interest rate plus a buffer, typically 3%) to calculate the maximum loan amount that repayment could service over a 30-year term.

What is the assessment rate buffer?

The assessment rate buffer is an additional percentage (typically 3%) that banks add on top of the actual loan interest rate when calculating your borrowing power. For example, if the home loan rate is 6.5%, the bank assesses your ability to repay at 9.5%. This buffer, mandated by APRA (the Australian Prudential Regulation Authority), ensures borrowers can still afford repayments if interest rates rise. The buffer is one of the main reasons your borrowing capacity may be lower than you expect.

How do dependents affect borrowing power?

Each dependent reduces your borrowing power because banks factor in the additional cost of supporting them. Lenders use benchmarks like the Household Expenditure Measure (HEM) to estimate living costs, and these benchmarks increase with each dependent. Typically, each dependent adds around $300-$500 per month to your assessed living expenses, which directly reduces the amount of income available for mortgage repayments and therefore lowers your maximum loan amount.

Borrowing Power Calculator

Enter your income, expenses, and debts to estimate your home loan borrowing capacity. Uses the same assessment rate buffer and expense benchmarks that Australian banks apply.

Last verified: 1 July 2025

How much can I borrow for a home loan in Australia?

Australian banks typically lend 5 to 6 times gross household income, adjusted down for existing debts, dependents, and living expenses. APRA requires lenders to assess repayments at a 3% buffer above the actual rate — so a 6.2% loan is stress-tested at 9.2%. This buffer is why your borrowing capacity is usually lower than rough income multiples suggest. Source: APRA Prudential Standard APS 220; ASIC MoneySmart.

Worked example. Single, $120,000 gross salary, no dependents, no other debts. Living expenses ~$2,800/ month. At a 6.2% rate stress-tested to 9.2% over 30 years, borrowing capacity is roughly $620,000 to $680,000. Adding a $500/month car loan drops that by about $55,000; one dependent drops it by another $40,000-$60,000.

General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.

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