Lenders decide how much you can borrow using a serviceability assessment, not your ability to service the repayments in practice.
Every lender runs your income and expenses through their own calculation method, applies a buffer to the interest rate, and checks whether you can still afford the repayments under stress conditions. That determines your borrowing capacity. The problem is that lenders treat the same income and expenses differently. One lender might count 80% of your rental income. Another might only count 50%. One lender might ignore childcare costs if your youngest child is over a certain age. Another might deduct them in full. The result is that your borrowing capacity changes depending on which lender assesses the application, sometimes by tens of thousands of dollars.
How Lenders Treat Income Differently
Lenders assess income by applying a discount or acceptance rate to each source of income you declare.
Base salary is usually counted at 100%, but overtime, bonuses, commission, and rental income are all discounted. The rate varies between lenders. One major bank might count 80% of your overtime if you have received it for the past two years. A non-major lender might accept 100% if it has been consistent for 12 months. Rental income is often shaded at 75% or 80% to allow for vacancies and maintenance, but some lenders will accept 100% if you provide a signed lease and evidence of consistent payments. Self-employed income is assessed on taxable income in most cases, which means any depreciation, work vehicle expenses, or other tax deductions reduce what the lender will count. If your taxable income is $90,000 but your actual cash flow is $130,000, the lender will serviceability test you on $90,000 unless you apply through a lender that allows add-backs for non-cash deductions.
Consider a buyer working full-time on a base salary of $95,000 with $18,000 in consistent overtime and a rental property generating $28,000 annually. One lender might assess income at $95,000 plus 80% of overtime and 75% of rental income, giving a total assessed income of around $130,000. Another lender using 100% of overtime and 80% of rental income would assess income closer to $136,000. That difference alone can shift borrowing capacity by $30,000 or more, depending on other commitments.
The Buffer That Reduces Every Loan Amount
Every lender applies an interest rate buffer on top of the actual rate you will pay.
The Australian Prudential Regulation Authority requires lenders to test your ability to repay at a rate higher than the current variable rate. The buffer is usually between 2.5% and 3%. If the actual variable rate is 6.2%, the lender will test whether you can afford repayments at 8.7% or 9.2%. This is called the serviceability rate or assessment rate. It exists to ensure you can still afford the loan if rates rise. The buffer applies regardless of whether you choose a fixed rate, variable rate, or split loan. Even if you fix at 5.8% for three years, the lender will still assess you at a rate above 8.5%.
The buffer reduces how much every borrower can access. A household assessed at a 6.2% interest rate might be able to borrow $650,000 based on their income and expenses. The same household tested at a 9% serviceability rate might only be approved for $520,000. The buffer is not disclosed on your loan documents because it is not the rate you pay. It is an internal test rate the lender uses during the application.
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Living Expenses and the HEM Benchmark
Lenders assess your living expenses using either your declared expenses or a benchmark called the Household Expenditure Measure.
The HEM is published by the Melbourne Institute and represents the minimum cost of living for different household types across Australia. Lenders use it as a floor. If you declare $2,400 per month in living costs but the HEM for your household size is $3,100, the lender will assess you at $3,100. Some lenders will accept your actual declared expenses if they are below the HEM, but most will not. This affects borrowers in regional areas or those with low cost structures. If you live in a paid-off home, share expenses with family, or have no dependents, your actual living costs might be well below the benchmark, but the lender will still apply the HEM figure in the calculation.
A single applicant with no dependents applying through a major lender in Perth might have the HEM applied at around $2,800 to $3,200 per month depending on the lender's version of the benchmark. If that applicant declares actual expenses of $1,900 per month, the lender will serviceability test them using the higher figure. That reduces the loan amount by roughly $50,000 compared to a lender that accepts declared expenses.
How Existing Debts Are Assessed
Lenders treat your current commitments based on limits, not balances.
If you have a credit card with a $15,000 limit and a zero balance, most lenders will assess you as though you are carrying a debt of $15,000 and making monthly repayments on that amount. The monthly repayment is usually calculated as 2.5% to 3.8% of the limit, depending on the lender. A $15,000 limit can reduce your borrowing capacity by $70,000 to $90,000 even if you never use the card. The solution is to close or reduce the limit before applying. Personal loans, car loans, and buy-now-pay-later accounts are assessed at the actual repayment amount. Investment loan commitments are included, and some lenders will apply a loading to account for potential rate rises on those loans as well.
If you are repaying a $40,000 car loan at $950 per month and hold two credit cards with combined limits of $25,000, the lender might deduct $1,900 to $2,200 from your monthly surplus before calculating how much you can borrow. Closing the cards and refinancing the car loan into a lower repayment or paying it out can recover $120,000 or more in borrowing capacity depending on your income.
Why Serviceability Differs Between Lenders
No two lenders use the same settings.
One lender might apply a buffer of 2.5%, accept 100% of overtime, and use your declared living expenses. Another might apply a 3% buffer, count 80% of overtime, and enforce the HEM. A third might allow add-backs for self-employed applicants but apply a higher buffer for investors. The result is that your borrowing capacity is not a single number. It is a range that depends entirely on which lender assesses the application. In our experience, applicants who are declined by one lender or offered a lower amount than expected are often approved for the full amount through a different lender using the same income and expenses.
That is why submitting an application without comparing how lenders will treat your specific income and commitments usually costs you either approval or borrowing capacity. A broker who knows how each lender builds their serviceability model can structure the application to suit your circumstances rather than hoping the lender's policy aligns with your situation. You can read more about how different loan structures affect your outcome on our Home Loans page, and if you are buying for the first time, the First Home Buyers section covers how deposit size and scheme eligibility interact with serviceability.
What You Can Control Before Applying
You cannot change the buffer or the HEM, but you can change how your income and commitments are assessed.
Close credit cards and reduce limits on any cards you want to keep. Pay out small personal loans or consolidate them into a lower monthly repayment. If you are self-employed, speak to your accountant about structuring your income to maximise taxable income in the year before you apply, or apply through a lender that allows depreciation and other non-cash expenses to be added back. If you receive overtime, commission, or bonus income, gather payslips and a letter from your employer confirming it is ongoing. If you own an investment property, provide the lease and evidence of rental payments hitting your account. The more evidence you provide, the higher the percentage of that income the lender is likely to accept.
If you are moving from another loan or your fixed rate is ending soon, a Loan Health Check will show whether your current lender is still treating your income the same way they did when you first borrowed, or whether switching lenders would increase your capacity. Lenders tighten and loosen their serviceability settings regularly, and the lender that approved you three years ago may no longer be the one that gives you the most capacity now. Borrowers who want to access equity for renovations, investment purchases, or debt consolidation often find they cannot do so with their current lender, but can with another. You can also review your position and compare how lenders assess your situation through our Borrowing Capacity page.
Call one of our team or book an appointment at a time that works for you. We will run your income, expenses, and commitments through multiple lender serviceability models and show you which lender will approve the amount you need, rather than guessing and applying blind.
Frequently Asked Questions
What is a serviceability assessment?
A serviceability assessment is the calculation a lender uses to decide how much you can borrow. It is based on your income, expenses, existing debts, and a buffer added to the interest rate to test whether you could still afford the loan if rates rise.
Why does my borrowing capacity change between lenders?
Each lender applies different acceptance rates to your income, uses a different interest rate buffer, and assesses expenses and commitments differently. One lender might count 80% of your overtime while another counts 100%, and those differences can shift your borrowing capacity by tens of thousands of dollars.
What is the HEM and how does it affect my loan application?
The Household Expenditure Measure is a benchmark for minimum living costs published by the Melbourne Institute. Lenders use it as a floor when assessing your expenses. If your declared living costs are lower than the HEM, most lenders will still assess you using the HEM figure, which reduces your borrowing capacity.
How do credit cards affect how much I can borrow?
Lenders assess credit cards based on the limit, not the balance. A card with a $15,000 limit and no balance can reduce your borrowing capacity by $70,000 to $90,000 because the lender assumes you could draw on the full limit at any time.
Can I increase my borrowing capacity before applying?
Yes. Close or reduce credit card limits, pay out small debts, and provide strong evidence of any overtime, bonus, or rental income. Self-employed applicants should speak to their accountant about structuring income to maximise taxable income or apply through a lender that allows add-backs for non-cash deductions.
