Lesson 1 of 4
How lenders decide what you can borrow
The actual calculation behind your borrowing power, step by step.
8 minute read
Borrowing power feels mysterious, but the calculation is mechanical. Understanding it tells you exactly which levers you can pull.
The calculation
- Start with your income — but only the part the lender will count. Casual and contract income is often 'shaded', meaning only 80–90% of it counts.
- Take off tax, the Medicare levy, and any compulsory HECS repayment. Serviceability runs on take-home pay.
- Subtract living expenses. If your declared figure is below the lender's benchmark, they use the benchmark.
- Subtract existing commitments — car loans, personal loans, buy-now-pay-later, and credit card limits.
- Whatever's left is your monthly surplus.
- Work out the largest loan that surplus could repay — but at your rate plus roughly three percentage points, not at your actual rate.
Why two lenders give different answers
Every lender uses this same shape, but they choose their own inputs: how much they shade casual income, what living expense benchmark they use, how they treat HECS, whether they count overtime. The spread between the most and least generous lender for the same borrower can easily be a hundred thousand dollars or more. That is precisely what a broker is for.
Two lenders, same borrower, same week — and a $140,000 difference in what they'd lend. Neither of them was wrong. They just count things differently.
The short version
- Income, minus tax, minus expenses, minus commitments, equals surplus.
- The surplus is tested at roughly 3% above your actual rate.
- Lenders shade casual and contract income.
- The gap between lenders on the same borrower can be enormous.
Quick check
If your interest rate is 6%, roughly what rate will a lender test you at?
Your next step
Run the borrowing power calculator and note which input moves the number most.