Home Loan Series 2 - How Much Is My Borrowing Power?

One of the first questions home buyers ask is, “How much can I borrow?” The answer depends on several financial factors that lenders carefully assess when reviewing your home loan application. In this guide, we’ll break down the key elements that affect your borrowing power and discuss how you can increase it.

Factors That Affect Your Borrowing Power

• Income & Job Stability

• Living Expenses

• Existing Debts

• Credit Score

• Loan Term and Interest Rate

• Number of Dependents

Let's take a closer look at some of the key factors that the clients are usually confused with.

Income and Job Stability

1. Full-Time or Permanent Salary Income (i.e. PAYG Income)

   1. This is the most straightforward income type for lenders to assess.

   2. What lenders like are:

      1. Consistent income over at least 3 – 6 months

      2. Employment in the same industry or role for over 6 months

      3. No probation period (or at least probation ending soon)

   3. Documents Required:

      1. 2 most recent payslips

      2. Bank statements showing income deposits

      3. Employment contract or letter (if newly employed): If you're still on probation, some lenders may still consider your application, but others might require you to complete the probation period.

2. Casual Income

   1. Casual employees have less predictable hours, so lenders apply stricter rules.

   2. What lenders look for are:

      1. At least 6–12 months in the same job or with the same employer

      2. Consistent hours and income patterns

      3. Multiple jobs in the same field may be considered

   3. Casual income is often “shaded” (discounted by 20% or plus) and some lenders require a longer employment history to feel comfortable about your income stream.

3. Part-Time Income

   1. Part-time income is more stable than casual but still varies slightly between lenders.

   2. What lenders require are:

      1. Typically 3 – 6 months minimum in the current role

      2. Evidence of regular hours and pay

      3. May be combined with other sources (e.g. family tax benefit)

4. Contract Workers / Fixed-Term Contracts

   1. Contractors are assessed based on the length and stability of the contract history.

   2. Assessment factors are:

      1. Current contract length and renewal likelihood

      2. History of contracting in the same industry

      3. ABN and GST registration (for independent contractors)

   3. If you have been contracting for more than 12 months with consistent income, some lenders will assess you similarly to a PAYG income earner.

5. Self-Employed / Business Owners

   1. Self-employed income is one of the most heavily scrutinised by lenders.

   2. What lenders usually require are:

      1. At least 2 years of trading history (but some lenders only require 18 months history)

      2. Business financial statements (P&L and Balance Sheet)

      3. Personal and business tax returns for the last 2 years (but some lenders only require 1 year tax returns)

      4. ATO's Notice of Assessment

   3. 💡Tips:

      1. Ensure your financials are up to date and accurately reflect your business profit

      2. Be mindful that excessive “tax minimisation” may reduce your borrowing power due to lower profitability of your business

6. Other Types of Income

   1. Bonuses, commissions, overtime, and allowances are often shaded (only 60–80% counted) unless proven consistent

   2. Rental income is usually accepted at 70–80% of gross rent

   3. Government payments (like Centrelink or child support) may be partially considered, depending on the lender and the type

Living Expenses - How Your Spending Affects Borrowing Power

Lenders want to ensure you can afford to repay the loan after covering your normal living costs. They compare your declared expenses with your bank statements to assess how realistic your budget is.

Categories lenders look at are:

• Housing costs (rent, utilities, internet, insurance)

• Groceries and dining out

• Transport (fuel, car registration, tolls, public transport)

• Children’s education and childcare

• Medical and health costs (including health insurance costs)

• Subscriptions and entertainment

• Clothing, gifts, holidays

💡 Tip: Lenders compare your actual expenses with a standard benchmark (like HEM – Household Expenditure Measure). If your expenses are much higher, it can reduce your borrowing capacity. However, if your expense are lower, they would use their standard benchmark HEM.

What you can do are:

• Review the past 3–6 months of your bank and credit card statements

• Cut unnecessary subscriptions and spending before applying

• Avoid large one-off or luxury purchases during the loan application process

Existing Debts – The Silent Borrowing Power Killer

If you have other loans or credit card debts, these will reduce your borrowing power. Lenders consider your debt-to-income ratio, which is the percentage of your income that goes towards paying off existing debts. Typical examples are:

• Car loan

• Personal loan

• Credit card

• HECS/HELP student loan

Also if have a standby debt facilities (even if you're not actively using your debts), those still can weigh heavily on how much you can borrow. The examples of these are:

• Unused credit card limit: For example, A credit card limit (even if you have not used it) may reduce your borrowing power by $40,000–$60,000, depending on the lender.

• Buy Now Pay Later (BNPL) (Afterpay, Zip, Klarna)

What you can do are:

• Reduce your credit card limits or cancel unused cards

• Pay off personal loans or consolidate those loans where possible

• Avoid opening new BNPL accounts or taking new loans before applying a home loan

Credit Score – Your Financial Reputation

Your credit score gives lenders a snapshot of how reliable you are with repayments and financial commitments. It ranges from 0 to 1,200 depending on the credit bureau.

💡 Tip: A strong credit score can help you access lower interest rates and a wider range of loan products. Whereas, a weaker credit score could result in rejection of your loan application.

What affects your credit score are:

• Late or missed bill repayments (e.g. phone, electricity, loans)

• Unpaid debts or defaults

• Too many credit applications in a short time

• Court judgments or bankruptcies

• Length of credit history

How to improve or protect your credit score:

• Always pay bills and debts on time

• Don’t apply for multiple credit cards or loans within a short period

• Check your credit report yearly to fix any errors (free via Equifax or Experian)

• Don’t let a forgotten $50 bill turn into a black mark on your record

Loan Term and Interest Rate – Structure Matters

The structure of the loan itself affects what you can borrow.

Loan Term

• Longer loan terms (e.g. 30 years) lower monthly repayments

• Lower repayments = higher borrowing capacity but more interest paid over the life of the loan

Interest Rate

• Lenders assess your ability to repay at a buffer rate (usually 2–3% above actual rate): A fixed rate doesn’t guarantee more borrowing power — lenders still use a “serviceability buffer” to ensure you could afford future rate rises.

• Lower interest = lower repayments = higher borrowing capacity

Final Thoughts

Everyone’s situation is different — your employment type, family size, debts, and even choice of lender can dramatically change how much you’re eligible to borrow. That is why it is critically important that you should work with a good mortgage broker.

A good mortgage broker can:

• Assess your true borrowing power

• Recommend actions to improve it

• Match you with lenders who understand your situation

In the next article, we will discuss the value and benefit of working with a good mortgage broker.

If you have further questions, please contact us (https://www.goodpca.com.au/contact-us). We are also a licenced mortgage broker and can help you with better home loan solutions.

Disclaimer

This content is intended as a general guide for GOOD PEOPLE ACCOUNTING SERVICES clients. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, GOOD PEOPLE ACCOUNTING SERVICES disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.