Excel Borrowing Power Calculator
Calculate your maximum borrowing capacity based on your financial situation. This advanced calculator uses the same algorithms as major Australian lenders to give you an accurate estimate of how much you can borrow for your home loan.
Your Borrowing Power Results
- This is an estimate only and doesn’t constitute loan approval
- Actual borrowing power may vary between lenders
- Lenders may apply different assessment rates (often 3% above your actual rate)
- Consider additional costs like stamp duty, LMI, and legal fees
Comprehensive Guide to Understanding Borrowing Power in 2024
Your borrowing power – also known as borrowing capacity – is the maximum amount a lender is willing to loan you based on your financial situation. This comprehensive guide will explain everything you need to know about calculating and improving your borrowing power in Australia’s current economic climate.
What Exactly is Borrowing Power?
Borrowing power refers to the maximum loan amount a financial institution is prepared to lend you based on:
- Your income (salary, bonuses, investments, rental income)
- Your expenses (living costs, existing debts, dependents)
- Your assets and liabilities
- Current interest rates and lending policies
- Loan term and type (owner-occupied vs investment)
Lenders use sophisticated algorithms to assess your ability to service a loan without experiencing financial hardship. The calculation typically uses an “assessment rate” that’s higher than the actual interest rate (usually 2-3% higher) to account for potential rate rises.
How Lenders Calculate Your Borrowing Power
While each lender has their own proprietary formula, most follow this general approach:
- Income Assessment: Lenders typically use 80-100% of your base salary, but may only consider 50-80% of bonus income or overtime.
- Expense Calculation: They use either your declared living expenses or the APRA’s HEM benchmark (Household Expenditure Measure), whichever is higher.
- Debt Servicing: Your existing debts (credit cards, personal loans, etc.) are factored in at their minimum repayment amounts.
- Buffer Application: Most lenders apply a 2-3% buffer to the current interest rate to test your ability to repay if rates rise.
- Net Surplus Calculation: The difference between your income and expenses determines how much you can borrow.
| Factor | Owner Occupied (%) | Investment (%) |
|---|---|---|
| Base Salary Usage | 100% | 100% |
| Bonus/Overtime Usage | 80% | 50% |
| Rental Income Usage | 80% | 80% |
| Assessment Rate Buffer | 3.0% | 3.0% |
| Maximum LVR (no LMI) | 80% | 70% |
Key Factors That Affect Your Borrowing Power
1. Income Sources
Lenders categorize income into different types with varying reliability:
- Permanent Salary: 100% considered (most reliable)
- Bonuses/Overtime: Typically 50-80% considered
- Rental Income: Usually 80% considered (20% vacancy factor)
- Investment Income: Varies by asset type (dividends, interest)
- Government Benefits: Often only 50-80% considered
2. Living Expenses
Lenders use either:
- Your declared expenses (if you can provide 3 months of bank statements)
- The HEM benchmark (Household Expenditure Measure) which varies by household size and location
As of 2024, the basic HEM for a single person is approximately $1,500/month, while a family of four would be around $3,500/month in capital cities.
3. Existing Debts
All existing financial commitments reduce your borrowing power:
- Credit cards (assessed at 2-3% of limit per month)
- Personal loans (actual repayment amount)
- Car loans (actual repayment amount)
- Other mortgages (assessed at current interest rate + buffer)
- Buy Now Pay Later services (increasingly being considered)
4. Interest Rates and Buffers
Lenders don’t use the actual interest rate for calculations. They apply a “buffer” to test your ability to repay if rates rise. As of 2024:
- Most lenders use a 3% buffer (e.g., if rate is 6%, they assess at 9%)
- Some specialist lenders may use slightly lower buffers
- APRA requires minimum 3% buffer for all residential mortgages
5. Loan Term
The longer your loan term, the lower your monthly repayments will be, which can increase your borrowing power. However:
- 30 years is standard for owner-occupied loans
- Investment loans often limited to 25-30 years
- Longer terms mean more interest paid over the life of the loan
How to Improve Your Borrowing Power
-
Reduce Existing Debt:
Pay down credit cards, personal loans, and car loans. Even reducing credit card limits can help, as lenders assess the full limit as potential debt.
-
Increase Your Income:
Consider overtime, bonuses, or secondary income streams. Remember that some income types are treated more favorably than others.
-
Minimize Living Expenses:
Review your spending for 3 months before applying. Lenders will take the higher of your declared expenses or the HEM benchmark.
-
Improve Your Credit Score:
A higher credit score (700+) can qualify you for better rates, which increases your borrowing power. Pay bills on time and avoid multiple credit applications.
-
Save a Larger Deposit:
A 20% deposit avoids Lenders Mortgage Insurance (LMI), which can save you thousands and potentially increase your borrowing capacity.
-
Choose the Right Lender:
Different lenders have different policies. Some may be more favorable to self-employed borrowers, while others specialize in certain professions.
-
Consider a Longer Loan Term:
Extending from 25 to 30 years can increase your borrowing power by reducing monthly repayments (though you’ll pay more interest long-term).
-
Apply with a Co-Borrower:
Adding a partner or family member with income can significantly increase your combined borrowing power.
Common Mistakes to Avoid
| Mistake | Why It’s Problematic | Solution |
|---|---|---|
| Not declaring all debts | Lenders will discover undeclared debts during credit checks, which can lead to application rejection | Be completely transparent about all financial commitments |
| Overestimating income | Lenders verify income with payslips and tax returns. Overestimating is considered fraud | Use actual documented income figures |
| Underestimating expenses | Lenders use the higher of your declared expenses or HEM benchmark | Track expenses accurately for 3+ months before applying |
| Applying with multiple lenders | Each application creates a credit enquiry, which can lower your credit score | Get pre-approval from one lender first |
| Changing jobs before applying | Lenders prefer stable employment history (typically 6+ months in current role) | Wait until after loan approval to change jobs if possible |
| Ignoring credit score | A low score can disqualify you or result in higher interest rates | Check and improve your score before applying |
How Borrowing Power Varies by Lender
Different lenders can assess the same application very differently. Here’s why:
- Income Assessment Policies: Some lenders are more generous with bonus income or self-employed applicants
- Expense Calculations: Some use actual expenses, others use HEM, some use a blend
- Assessment Rates: While most use a 3% buffer, some may use slightly different buffers
- LVR Policies: Maximum loan-to-value ratios vary, especially for investment properties
- Risk Appetite: Some lenders specialize in certain borrower types (e.g., doctors, professionals)
For example, a borrower with $120,000 income, $3,000 monthly expenses, and $50,000 in savings might get:
- $750,000 borrowing power with Bank A
- $820,000 with Bank B
- $680,000 with Bank C
Borrowing Power vs. Affordability
It’s crucial to understand that your borrowing power isn’t necessarily what you can comfortably afford. Lenders use conservative measures, but you should consider:
- Lifestyle Costs: Can you still afford holidays, dining out, and entertainment?
- Future Changes: Are you planning to have children, change careers, or start a business?
- Rate Rises: Can you handle repayments if rates increase by 2-3%?
- Maintenance Costs: Have you budgeted for property maintenance (1-2% of property value annually)?
- Insurance: Building insurance, contents insurance, and mortgage protection costs
A good rule of thumb is to borrow at least 20% less than your maximum borrowing power to maintain financial flexibility.
The Impact of Interest Rates on Borrowing Power
Interest rates have a dramatic effect on how much you can borrow. Here’s how borrowing power changes with rate movements for a borrower with $100,000 income and $2,500 monthly expenses:
| Interest Rate | Assessment Rate (with 3% buffer) | Borrowing Power (30 year term) | Monthly Repayment |
|---|---|---|---|
| 4.00% | 7.00% | $780,000 | $5,180 |
| 5.00% | 8.00% | $700,000 | $5,320 |
| 6.00% | 9.00% | $630,000 | $5,400 |
| 7.00% | 10.00% | $570,000 | $5,430 |
| 8.00% | 11.00% | $520,000 | $5,450 |
As you can see, a 2% increase in interest rates can reduce your borrowing power by over 20%. This is why lenders use assessment rates that are significantly higher than current rates.
Special Considerations for Different Borrower Types
Self-Employed Borrowers
If you’re self-employed, lenders typically require:
- 2 years of financial statements
- 2 years of tax returns
- Business Activity Statements (BAS)
- Often only 80% of your declared income is used
Some lenders specialize in self-employed borrowers and may offer more favorable terms if you can demonstrate strong, consistent income.
First Home Buyers
First home buyers may benefit from:
- First Home Owner Grant (FHOG) – varies by state
- First Home Loan Deposit Scheme (FHLDS) – allows 5% deposit without LMI
- Stamp duty concessions in some states
However, first home buyers often have shorter credit histories, which can limit borrowing power.
Investors
Property investors face different rules:
- Rental income is typically assessed at 80% (20% vacancy factor)
- Interest rates for investment loans are often 0.5-1.0% higher
- Maximum LVR is usually 80% (compared to 90-95% for owner-occupied)
- Some lenders limit the number of investment properties
Professionals and High-Income Earners
Some lenders offer special programs for:
- Medical professionals (doctors, dentists, veterinarians)
- Legal professionals
- Accountants and financial advisors
- Engineers and IT professionals
These programs may offer:
- Higher income assessment (up to 100% of bonuses)
- Lower assessment rates
- Higher LVR limits
- Reduced LMI costs
Using Our Borrowing Power Calculator Effectively
To get the most accurate estimate from our calculator:
- Be Precise with Income: Use your exact base salary and average bonus amounts
- Include All Income Sources: Don’t forget rental income, dividends, or government benefits
- Declare All Debts: Include credit cards (even if paid in full), personal loans, and car loans
- Use Realistic Expenses: Track your actual spending for a month to get accurate figures
- Consider Different Scenarios: Try different interest rates to see how rate changes affect your borrowing power
- Test Different Loan Terms: See how 25 vs 30 year terms affect your maximum borrow amount
Remember that this calculator provides an estimate. For an exact figure, you’ll need to:
- Get pre-approval from a lender
- Provide full documentation (payslips, tax returns, bank statements)
- Undergo a full credit check
The Future of Borrowing Power Calculations
Several trends are shaping how borrowing power is calculated:
- Open Banking: Lenders can now access your actual transaction data (with permission) for more accurate expense assessment
- AI and Machine Learning: Some lenders use AI to analyze spending patterns and predict future financial behavior
- Real-Time Income Verification: Instant verification of employment and income through digital systems
- Climate Risk Assessment: Some lenders are starting to factor in property location risks (flood, bushfire) which may affect LVR
- Behavioral Economics: Analysis of your saving/spending habits to determine financial discipline
These advancements may lead to more personalized borrowing power assessments in the future, potentially benefiting borrowers with strong financial habits.
Frequently Asked Questions
Why is my borrowing power lower than I expected?
Common reasons include:
- Lender using the HEM benchmark which may be higher than your actual expenses
- Assessment rate being 2-3% higher than the actual rate
- Not all of your income being considered (e.g., only 80% of bonuses)
- Existing debts reducing your capacity
- Recent credit enquiries affecting your score
Can I borrow more if I have a larger deposit?
Not necessarily. Your deposit affects your LVR (Loan to Value Ratio) but doesn’t directly increase your borrowing power, which is based on serviceability. However, a larger deposit may:
- Help you avoid Lenders Mortgage Insurance
- Give you access to better interest rates
- Make you a more attractive borrower to lenders
How often should I check my borrowing power?
You should reassess your borrowing power when:
- Your income changes significantly
- You pay off major debts
- Interest rates move by 0.5% or more
- Your living situation changes (e.g., having children)
- You’re considering a major purchase
Does my credit score affect my borrowing power?
Yes, but indirectly. A higher credit score:
- May qualify you for better interest rates, which increases your borrowing power
- Makes you more likely to be approved for the maximum amount
- Can help you avoid higher risk premiums some lenders charge
However, the score itself isn’t directly plugged into borrowing power calculations.
Can I increase my borrowing power after getting pre-approval?
Yes, by:
- Paying down existing debts
- Increasing your income
- Reducing your living expenses
- Improving your credit score
- Adding a co-borrower
You would need to apply for a new pre-approval to have the increased amount recognized.