Do you know how much you can actually borrow?

Your borrowing capacity is the maximum amount a lender will let you borrow based on your income, expenses, and financial commitments.

Most people searching for a home in Mill Park assume they know what they can afford, but lenders calculate borrowing capacity differently than you might expect. The figure you land on could be higher or lower than you think, and the difference often comes down to details you can control.

How lenders calculate what you can borrow

Lenders assess your borrowing capacity by comparing your income against your living expenses and existing debts, then applying a buffer to account for potential rate rises.

Consider a buyer earning $85,000 a year who works full time and has $12,000 in credit card limits and a $400 monthly car loan. The lender takes their gross income, subtracts tax, adds up their monthly debt repayments, estimates living costs using a benchmark or the buyer's actual declared spending, and then tests whether the buyer could still afford the loan if the interest rate increased by three percentage points. That buffer has been in place since late 2021 and applies to every application.

The lender's serviceability calculation uses either the Household Expenditure Measure, a standard benchmark based on household size and location, or the buyer's actual declared expenses, whichever is higher. If your rent is $1,800 a month but the benchmark says a single person in your situation typically spends $2,200, the lender uses $2,200. You cannot negotiate that figure down by showing lower spending if it sits below the benchmark.

What reduces your borrowing capacity without you realising

Credit card limits reduce what you can borrow even if you pay the balance in full each month.

A $10,000 credit card limit can reduce your borrowing capacity by around $50,000, regardless of whether you owe anything on the card. Lenders assume you could draw the full limit at any time, so they factor the potential repayment into your expenses. Closing cards or reducing limits before you apply has an immediate effect on how much you can borrow.

Buy now, pay later accounts work the same way. Even small limits add up quickly when a lender is stress testing your income at a rate three percentage points higher than the actual loan rate. If you are not using those accounts, close them before you speak to a mortgage broker for first home buyers in Mill Park.

Income types that lenders treat differently

Base salary is the easiest income to use, but overtime, bonuses, and commission all have different rules depending on how long you have been earning them.

Lenders generally accept overtime if you have been receiving it consistently for at least three months, though some want to see six or 12 months of payslips. Bonuses usually require a two-year history, and the lender will average the amounts across that period rather than taking the most recent figure. Commission income follows a similar pattern, with most lenders requiring tax returns and a letter from your employer confirming the arrangement is ongoing.

If you are self-employed, most lenders want two years of tax returns and financials prepared by an accountant. The amount they lend against is typically your taxable income after deductions, not your turnover. That creates a tension for buyers who have been minimising tax, because a lower declared income means a lower borrowing capacity. Some lenders offer low doc loans for first home buyers that rely on accountant declarations or business activity statements rather than full financials, but those products usually come with higher rates and lower maximum loan-to-value ratios.

Why two buyers do not always double the borrowing amount

Adding a second applicant increases your combined income, but it also increases the living expenses the lender uses in the calculation.

In a scenario like this, a single buyer earning $80,000 might be able to borrow around $450,000, depending on their debts and expenses. A couple earning $80,000 and $70,000 might expect to borrow close to $850,000 based on their combined income of $150,000, but the actual figure often lands closer to $700,000 to $750,000. The reason is that the Household Expenditure Measure for a two-person household is higher than for a single person, and any debts or credit limits either applicant holds are added into the calculation.

If one person has a strong income and low debts while the other has lower income and higher debts, it can sometimes make sense to apply individually rather than jointly. That only works if the higher earner can service the loan on their own and you are comfortable with only one name on the title, which has implications for ownership and future borrowing. A broker can model both scenarios and show you which structure gives you the higher borrowing capacity and whether the trade-off is worth it.

The link between deposit size and how much you can borrow

A larger deposit reduces the amount you need to borrow, but it also affects the loan-to-value ratio, which can change the interest rate and whether you pay lenders mortgage insurance.

Buyers in Mill Park, where the median house price sits in the mid $600,000 range, often aim for a 10% deposit to access the Australian Government 5% Deposit Scheme, which covers the gap between a 5% deposit and the 20% threshold lenders typically require to avoid LMI. If you are borrowing 95% of the property value, your borrowing capacity needs to cover not just the loan amount but also the serviceability test at the higher rate. A 10% or 20% deposit does not increase the amount the lender is willing to lend based on your income, but it does reduce the amount you are asking for, which means you are more likely to stay within your maximum borrowing capacity when you find a property.

Some lenders also offer better interest rates at lower LVRs. Dropping from 95% to 90%, or from 90% to 80%, can reduce your rate by 0.10% to 0.30%, depending on the lender. That rate reduction improves your serviceability slightly, because the repayment amount the lender uses in the calculation is lower.

How paying down debt now increases what you can borrow later

Every dollar of monthly debt repayment you remove increases your borrowing capacity by roughly 150 times that amount, depending on interest rates and the lender's assessment rate.

If you have a personal loan with $300 monthly repayments and six months left to run, paying it out early could increase your borrowing capacity by $40,000 to $50,000. The same logic applies to car loans, student debts that are being actively repaid above the compulsory amount, and any other recurring commitment that appears on your credit file or payslip. Lenders do not care why the debt exists or whether it was a sensible purchase. They only care about the monthly commitment and whether it reduces the amount you can allocate to a mortgage repayment.

The decision to pay down debt versus save a larger deposit depends on the interest rate of the debt, how much borrowing capacity you need, and how close you are to affording the properties you want. If your borrowing capacity is already enough and you just need a bigger deposit, saving makes more sense. If you are $30,000 short of what you need to borrow, clearing a car loan might be the faster path.

Choosing a loan structure that suits your income pattern

Most buyers in Mill Park use a standard variable rate loan with principal and interest repayments, but a split loan or offset account can give you more control without reducing your borrowing capacity.

A split loan divides your borrowing between a fixed rate portion and a variable rate portion. The fixed portion protects you from rate rises for a set period, while the variable portion gives you the flexibility to make extra repayments or redraw funds without penalty. Lenders calculate your borrowing capacity using the higher of the fixed or variable rate plus the three percentage point buffer, so splitting the loan does not reduce what you can borrow. It does, however, give you certainty around part of your repayment, which can make budgeting easier once you settle.

An offset account linked to your variable rate loan reduces the interest you pay without technically making extra repayments. You keep your savings in the offset account, and the lender calculates interest on your loan balance minus the offset balance. If you have a $500,000 loan and $30,000 in your offset account, you only pay interest on $470,000. The benefit grows over time as you add more to the offset, and you can access the funds at any time without asking the lender for approval. Lenders do not factor your offset balance into the borrowing capacity calculation, so it does not help you borrow more, but it does reduce the total cost of the loan once you have settled.

When to get your borrowing capacity assessed

You should know your borrowing capacity before you start attending open homes, because it determines which properties you can realistically afford and how much deposit you need.

Getting loan pre-approval involves a full credit check and income verification, and the assessment is usually valid for three to six months depending on the lender. Pre-approval does not guarantee the lender will settle the loan, because they still need to value the property and confirm nothing has changed with your finances, but it does give you a firm figure to work with and shows sellers you are ready to move quickly.

Some buyers wait until they have found a property before they speak to a broker, which often means they find out too late that they cannot borrow enough or that their deposit falls short once stamp duty and conveyancing costs are included. Knowing your borrowing capacity early lets you adjust your search, save a bigger deposit, or clear debts that are holding the figure down.

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