How do Australian banks calculate my borrowing capacity?
There's no single formula — see the inputs banks actually weigh: income, existing debts, expenses and the interest rate buffer.
How do Australian banks calculate my borrowing capacity?
There’s no single figure a bank plugs your salary into. Every Australian lender that offers home loans is legally required to make its own reasonable inquiries into your income and your expenses, take reasonable steps to verify what you tell them, and then form a view on whether you could keep meeting the repayments without substantial hardship. That test comes from the responsible lending obligations in ASIC’s Regulatory Guide 209 (RG 209), and it doesn’t prescribe a formula — it leaves room for lenders to weigh things differently.
What’s consistent across lenders is the shape of the assessment, not the numbers inside it. Every lender looks at four broad inputs: your income (and how much of it counts), your existing financial commitments, your living expenses, and a buffer applied to the interest rate to test what happens if rates rise. This article walks through each of those, at the level the regulatory framework actually sets — not at the level of any single bank’s internal policy, which isn’t public and varies between institutions.
What is a “responsible lending” assessment?
A responsible lending assessment is the process a lender must go through before approving a home loan, set out in RG 209. In ASIC’s own framing, the lender must make reasonable inquiries about your income and expenses, take reasonable steps to verify that information, and then assess whether you could meet the loan repayments without substantial hardship. RG 209 is explicit that what counts as “reasonable” scales with the size and type of the loan and the consumer’s circumstances — it isn’t a fixed checklist, and it doesn’t set a single pass/fail number.
That flexibility is why two lenders can look at the same application and land on different outcomes. Individual lender credit policy — including how any one bank weights a factor, or where it draws a line — isn’t published, and this article doesn’t assert what any named lender does. What follows is the framework every lender operates inside, not any one lender’s rulebook.
How do lenders assess my income?
Salary is the starting point, but it isn’t simply added up at face value. Non-salary income — bonuses, overtime, commissions, and rental income from an investment property — is generally discounted before it’s counted toward your capacity. APRA’s prudential guidance for lenders (APG 223, current as at July 2026) describes prudent practice as applying a discount of at least 20% to most types of non-salary income, with a higher discount in some cases.
Rental income specifically gets its own mention: APG 223 describes a minimum haircut of 20% on expected rental income as prudent practice, with a larger haircut where a property carries a higher risk of sitting vacant. The guide also notes that a lender would normally place less weight on a third party’s estimate of future rent than on rent a borrower is actually already receiving. None of this is a rule that binds every lender to exactly 20% — APG 223 is a prudential practice guide, and APRA describes practice guides as not themselves creating enforceable requirements. It’s a description of what APRA considers sound practice, not a published formula you can back-calculate your own number from.
How do my existing debts and commitments count against me?
Any credit you already have — another loan, a car lease, a credit card — is treated as an ongoing commitment that reduces the amount left over for a new mortgage. This is where the interest rate buffer becomes important: lenders don’t test your existing debts at the rate you’re actually paying today. Under Attachment C of Prudential Standard APS 220, Australian ADIs (banks and other authorised deposit-taking institutions) must apply a buffer of at least 3.0 percentage points over a loan’s interest rate, and — critically — that buffer applies to your existing debts as well as the new loan you’re applying for.
The buffer, in outline: assessed repayment ability is tested using the actual (or a reference) interest rate plus a buffer of at least 3.0 percentage points, applied to both the loan being assessed and any existing debt commitments you already carry.
See our guide to what the interest rate buffer is and why it exists for the full detail on where that 3.0% figure comes from and how it’s used.
This is also why the type of existing commitment matters more than any single dollar figure. A personal loan used toward a house deposit, for instance, still shows up as an existing repayment obligation once you apply for a mortgage — the mechanism is the same as any other debt. Beyond that general mechanic, this article doesn’t put a number on how any specific debt or credit limit changes a borrowing outcome; that depends on the lender’s own policy and your full financial position.
How do my living expenses factor in?
Lenders are required to make reasonable inquiries into your expenses too, not just your income. In practice, many use a benchmark figure — most commonly the Household Expenditure Measure (HEM), published quarterly by the Melbourne Institute at the University of Melbourne — to sense-check what you’ve told them.
RG 209 is careful about what a benchmark like HEM can and can’t do. ASIC’s guidance notes that a benchmark figure doesn’t tell a lender anything about your actual circumstances, and doesn’t confirm that what you’ve disclosed is true — quoting a Federal Court finding that a benchmark is “ultimately a notional figure in substitution for making reasonable inquiries.” Legitimate uses include sense-checking expenses a lender can’t otherwise verify, estimating your expenses after the loan settles, or testing a stated plan to cut spending. RG 209 also makes clear a benchmark isn’t meant to be treated as a floor where your own verified expenses are actually lower.
Does my age affect what I can borrow?
Age itself isn’t treated as a bar to lending. What RG 209 requires is that a lender consider foreseeable changes to your income — and approaching retirement while a loan is still being repaid is one example ASIC gives explicitly: a lender needs to work out whether that’s likely to change your income, and what income is expected to be available afterwards. APRA’s guidance for lenders adds that a prudent institution also considers the likely lower income and repayment capacity during a borrower’s impending retirement.
That’s a test about foreseeable income change, not a test about age as a decisive or prohibited factor in itself. How any individual lender applies it — and at what age it becomes relevant to a given application — isn’t published and varies by lender and by loan term.
Does policy differ between lenders?
Yes — and the regulatory framework is built to allow that. RG 209 sets a responsible lending test, not a shared calculator; APRA’s APG 223 sets out what it considers prudent practice for the buffer, income shading and expense benchmarks, but describes itself as a practice guide that doesn’t itself create enforceable requirements (the enforceable minimum sits in APS 220 itself). Inside that framework, individual lenders build their own serviceability calculators, weight income and expenses differently, and reach different conclusions from the same application. None of that is published in a way this article — or any article — can reduce to a single number.
What actually shapes the outcome — a summary
| Input | What it captures | Why it varies |
|---|---|---|
| Income | Salary plus shaded non-salary income | Discount rates differ by lender |
| Existing commitments | Other loans, credit cards, leases | Assessed at the buffered rate |
| Living expenses | Declared expenses, checked against HEM | Household size and spending differ |
| Interest rate buffer | Minimum 3.0 points over the loan rate | Applies to new and existing debt |
Exact discount rates, benchmark treatment and buffer minimums above this floor vary by lender within the shared framework — see the sections above for how each one actually works.
So how do I find out what I can actually borrow?
This article can tell you the shape of the test — it can’t run it for you, because the inputs (your income, your debts, your expenses, and the specific lender’s own policy) are personal to your situation and aren’t published in a way that produces a reliable public number. A mortgage broker or lender can run an actual serviceability assessment against your figures and tell you where you land; that’s the right next step once you understand what’s being tested and why.
For the deposit side of the equation — how much you need saved before you even get to the borrowing-capacity conversation — see our guide to how much deposit you need for a first home in Australia.
