The Easiest Way to Understand Borrowing Capacity

Your borrowing capacity determines the loan amount a lender will approve based on your income, expenses, and financial commitments.

For buyers in Bentleigh East, understanding this calculation before you start looking at properties can prevent disappointment and help you position your application more effectively. The difference between what you think you can borrow and what a lender will approve often comes down to how expenses are assessed, not just your income.

How Lenders Calculate What You Can Borrow

Lenders use a debt-to-income ratio and a living expense assessment to determine your borrowing limit. Your gross income is measured against your existing debts and a minimum living expense benchmark set by the lender, which varies between institutions.

Consider a couple earning $140,000 combined who approach their bank expecting to borrow around $700,000. They have no other debts, but they do have a car lease at $650 per month and an average credit card limit of $15,000. The lender applies a minimum living expense figure of $3,200 per month based on household size, then adds the car lease and calculates the credit card as if it were fully drawn at 3% of the limit each month. That $15,000 limit costs them $450 per month in serviceability even if the card sits at zero. Their actual borrowing capacity comes back at $620,000. The gap is entirely due to how the credit card limit is assessed.

Income Assessment for Owner Occupied Home Loans

Lenders assess PAYG income using your most recent payslip and tax return, with overtime and bonuses usually included at 80% of their value if consistent over two years. Self-employed applicants are assessed on their average taxable income over the last two financial years, and this is where structuring matters.

A physiotherapist working in Bentleigh East as a sole trader earning $160,000 before tax deductions might reduce their taxable income to $95,000 through legitimate business expenses and vehicle claims. The lender assesses the $95,000 figure, not the turnover. If that same person were applying for a home loan to purchase in the area, their borrowing capacity would be calculated on the lower declared income, which might limit them to around $450,000 rather than the $650,000 they expected. This is where speaking to a broker before lodging tax returns can make a tangible difference to timing and structure.

Fixed Rate, Variable Rate, and Borrowing Capacity

The interest rate type you choose affects the assessment rate lenders use to calculate serviceability. Most lenders assess variable rate loans at a buffer of 3% above the actual rate, while fixed rate loans are assessed at the fixed rate plus the same buffer.

At current variable rates, a lender might assess your application at around 8.5% to 9% even if the actual rate is closer to 6%. If you're applying for a fixed interest rate home loan, the lender assesses at the fixed rate plus buffer. A three-year fixed rate at 5.8% would be assessed at roughly 8.8%. The difference in monthly repayments at those assessment rates can shift your borrowing capacity by tens of thousands of dollars depending on the loan amount and your income level.

Expenses That Reduce Your Borrowing Capacity

Lenders account for existing debts, minimum living expenses, and dependants when calculating your capacity. Personal loans, car loans, Buy Now Pay Later accounts, and credit card limits all reduce what you can borrow, even if the balances are low or paid off each month.

Buy Now Pay Later services like Afterpay or Zip are treated as ongoing commitments. A $2,000 limit might reduce your borrowing capacity by $20,000 or more depending on the lender's policy. Similarly, a $10,000 personal loan with two years remaining reduces your capacity more significantly than the same loan with six months left. Paying down or closing accounts before applying can improve your position, but it needs to be done at least 30 days before the application to reflect on your credit file.

Improving Your Borrowing Capacity Before You Apply

Reducing your credit card limits, consolidating debts, and increasing your deposit all improve how much you can borrow. Closing unused accounts is more effective than paying them down to zero, as lenders assess the limit, not the balance.

If you're looking to apply for a home loan in Bentleigh East, cancelling a $20,000 credit card limit you no longer use can lift your borrowing capacity by $80,000 to $100,000 depending on your income. If you have multiple small debts, consolidating them into a single loan with a defined end date can also improve your serviceability, particularly if those debts are interest-free or revolving. A debt consolidation strategy should be discussed with a broker before proceeding, as the timing and structure affect how lenders view the application.

Borrowing Capacity and Loan to Value Ratio

Your deposit size affects your loan to value ratio, which in turn affects whether you'll pay Lenders Mortgage Insurance and how lenders assess risk. A higher deposit doesn't increase your borrowing capacity directly, but it reduces the loan amount required and can open access to lenders with more flexible serviceability policies.

Buyers in Bentleigh East with a 10% deposit will need to factor in LMI, which can add $15,000 to $30,000 to the amount borrowed depending on the property price and lender. A 20% deposit avoids LMI and may also provide access to better interest rate discounts. Some lenders tighten serviceability for loans above 90% LVR, so increasing your deposit from 10% to 15% can shift your capacity even if the income and expenses stay the same.

Using Offset Accounts and Home Loan Features to Build Equity

An offset account linked to your loan reduces the interest you pay without changing your repayment amount, which helps you build equity faster and can improve your borrowing capacity for future purchases. This is particularly relevant for buyers considering an investment property later or planning to upsize.

If you're weighing up a variable rate loan with full offset against a fixed rate loan without offset, the long-term benefit of paying down principal faster can outweigh a lower fixed rate over three years. A $500,000 loan with $30,000 sitting in a linked offset saves roughly $1,800 per year in interest at current rates, and that saving compounds as the offset balance grows.

Pre-Approval and Borrowing Capacity in Bentleigh East

Getting home loan pre-approval confirms your borrowing capacity and shows sellers you're a serious buyer. In Bentleigh East, where established family homes and newer townhouses both attract strong interest, having pre-approval in place allows you to act quickly when the right property comes up.

Pre-approval is valid for three to six months depending on the lender and is conditional on your financial position staying the same. If you change jobs, take on new debt, or your income drops, the pre-approval may no longer hold. It's worth noting that pre-approval doesn't lock in an interest rate, so if rates move between pre-approval and settlement, your repayments will reflect the current rate unless you've requested a rate lock.

If you're ready to understand exactly how much you can borrow and which lenders will give you the strongest position, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions