How Much Can I Borrow: Avoid These 4 Mistakes

Your borrowing capacity is determined by your income after tax, minus your living expenses and any debt repayments you already have.

Lenders apply a serviceability buffer on top of the advertised rate to test whether you could still afford repayments if rates increased. That buffer is typically around 3%, meaning a loan advertised at 6.5% might be assessed at 9.5%. If your income and expenses pass that stress test, the lender will approve the amount. If they don't, you'll be offered less or declined altogether.

The figure you're approved for can shift dramatically based on decisions you make before you apply. Small recurring payments, the loan structure you choose, and how you present your income all influence the outcome.

Mistake 1: Keeping Buy Now Pay Later accounts active before applying

Buy Now Pay Later services like Afterpay and Zip are treated as credit commitments, even if your balance is zero.

Lenders assess these accounts as though you're using the full credit limit available to you. If you have three BNPL accounts with a combined limit of $6,000, the lender may reduce your borrowing capacity by $30,000 to $50,000 depending on their policy. Closing those accounts before you lodge your application removes the liability entirely. You'll need to provide evidence that the accounts have been formally closed, not just paid down.

Consider a buyer who was pre-approved for $520,000 but wanted to borrow $550,000. After closing two BNPL accounts and cancelling a credit card with a $10,000 limit, the same lender increased the approval to $570,000 without any change to income or deposit.

Mistake 2: Applying for an interest-only loan when you don't need one

Interest-only loans are assessed on the full principal and interest repayment, not the reduced interest-only payment you'll actually make.

This means your borrowing capacity is identical whether you choose interest-only or principal and interest, but the lender's calculation assumes the higher repayment from day one. If you're not using the interest-only period strategically, such as redirecting cash flow into renovations or another investment, you're accepting a lower loan amount without gaining any benefit. Most lenders also restrict interest-only periods to five years on owner occupied home loans, after which the loan reverts to principal and interest anyway.

Declaring all your income correctly increases what you can borrow

Lenders assess different income types with different shading percentages.

Base salary is usually accepted at 100%, but overtime, bonuses, and commission income are often shaded between 50% and 80% depending on how long you've been receiving them and whether they're consistent across your payslips. If you've been earning overtime for two years and it appears on every payslip, most lenders will accept 80% of that figure. If it's irregular or recent, they may exclude it entirely. Self-employed income is assessed using tax returns, and most lenders require two full years of returns before they'll consider the income at all.

If you're employed but also run a side business that generates a loss on paper due to depreciation or deductions, that loss will reduce your borrowing capacity even if your cash flow is positive. The lender only sees the net taxable income, not the underlying cash position.

Mistake 3: Underestimating your living expenses on the application

Lenders don't just accept the living expense figure you declare.

They compare it to the Household Expenditure Measure (HEM), a benchmark based on household size and location. If you declare $2,000 per month in living costs but HEM suggests $3,500 for a household of your size, the lender will use the higher figure. Declaring expenses that are unrealistically low won't increase your borrowing capacity. It will either be adjusted by the lender or flag your application for closer scrutiny. If your actual spending is below HEM due to specific circumstances, such as living with family or having no dependents, your broker can provide context, but the lender will still apply their minimum threshold.

Another factor that catches buyers off guard is the treatment of rental payments. If you're currently renting and plan to stop once you purchase, some lenders will still include your rent as an ongoing expense in their assessment, while others will remove it. The policy varies by lender, and it can shift your borrowing capacity by tens of thousands of dollars.

Mistake 4: Not comparing how different lenders calculate capacity

Each lender applies a different serviceability policy.

One lender might assess your income at 80% while another accepts 100%. One might apply a 3% buffer while another uses 3.5%. The difference in what you're approved for can be $50,000 or more using the same income and expenses. A broker who works across multiple lenders can model your scenario with different serviceability calculators before you apply, so you're not locked into the first assessment you receive. If you're applying directly with your current bank, you're only seeing one version of what's possible.

In a scenario where a buyer earned $95,000 in base salary plus $15,000 in overtime, one lender approved $480,000 while another approved $530,000. The difference came down to how each lender treated the overtime income and the buffer rate they applied. The buyer's income and deposit hadn't changed. The lender's policy had.

How loan structure affects what you're approved for

Splitting your loan between fixed and variable portions doesn't change your borrowing capacity, but it does give you more control over repayments and flexibility.

A split rate structure lets you lock part of your loan while keeping the rest variable, which means you can make extra repayments on the variable portion without penalty while still having certainty on the fixed portion. Some lenders allow you to link an offset account to the variable portion, which reduces the interest you're charged without technically making extra repayments. The offset balance isn't counted as equity, but it has the same effect on your interest costs.

If you're borrowing close to your limit, choosing a loan with an offset and redraw can help you manage cash flow after settlement without needing to reapply for credit later.

Call one of our team or book an appointment at a time that works for you to model your scenario across different lenders and structures before you apply.

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