By VIP finance teamPublished 9 October 2026Updated 14 October 2026Last reviewed 9 October 202610 min read
How Do Australian Banks Calculate Borrowing Capacity?
Australian banks and other APRA-regulated authorised deposit-taking institutions (ADIs) generally calculate borrowing capacity by assessing your income, living expenses and existing debt commitments, then determining the largest loan your assessed surplus could support at the applicable assessment rate. APRA requires ADIs to apply a minimum 3 percentage-point serviceability buffer, while individual lenders apply their own credit policies.Quick Answer
Most Australian banks follow the same broad serviceability process, although the inputs, assumptions and settings differ from lender to lender: 1.Income: work out how much of your income is assessable, usually after tax and after discounting less certain income. 2.Expenses: estimate your living costs, checked against your bank statements and, often, a benchmark. 3.Commitments: deduct existing loans, credit card limits and other repayment obligations. 4.Assessment rate: test the new loan at a rate at least 3 percentage points above its actual rate. 5.Maximum loan: find the biggest loan whose assessed repayments the remaining surplus can support. Passing that test isn't the end. Lenders also look at the deposit and property, your credit history and their own limits on high debt-to-income lending.Key takeaways
How banks calculate borrowing capacity, step by step
Two sets of rules sit behind most assessments. APRA's prudential standard APS 220 requires ADIs to make a prudent judgement about whether you can repay, which typically means checking that your income covers the new repayments after allowing for your expenses, existing debts and a buffer. Responsible lending obligations under the National Consumer Credit Protection Act require a lender providing regulated consumer credit to make reasonable inquiries about your finances and take reasonable steps to verify them. Within the rules that apply to it, each lender writes its own credit policy, and that policy is where results start to differ.Step 1: Assessable income
Lenders generally start with verified employment income and assess the amount available to service the loan after applicable tax and other relevant deductions. Regular salary is usually treated more consistently than variable income. Income that is less certain is treated more cautiously. APRA guidance says prudent ADIs would generally apply discounts of at least 20 per cent to most types of non-salary income, such as bonuses, overtime, rental income and variable commissions, although the treatment remains subject to the lender's credit policy. How much each lender counts, and what history it wants to see, is its own policy. Employment type matters too. PAYG employees, casuals, contractors and the self-employed are evidenced differently, which is why the documents you provide (payslips, tax returns, notices of assessment) shape the result as much as the dollar figure.Step 2: Living expenses
Banks must consider your expenses, and APRA's standard calls for reasonable estimates collected from you. Lenders typically ask you to declare your spending, then test it against your bank statements and often against a benchmark such as the Household Expenditure Measure (HEM). Benchmarks can't replace asking about your actual situation. ASIC's guidance says they should be used in a way consistent with their design, and APRA's standard says they must not be a substitute for reasonable inquiries. In practice, understating your costs rarely helps. If your statements show higher spending than you declared, the lender may use the higher figure or otherwise adjust its assessment according to its credit policy.Step 3: Existing debts and commitments
Next comes everything you already owe or could owe. There is no single regulatory percentage for most of these items, so treatment is lender policy:Step 4: The assessment rate
APRA's standard requires ADIs to assess whether you can meet repayments at an interest rate at least 3.0 percentage points above the loan's product rate. The purpose is to build in a cushion against rate rises, a fall in income or an increase in expenses. APRA confirmed on 28 May 2026 that this buffer would remain at 3 percentage points. The 3 points is a minimum. Some lenders add their own margin or apply a floor rate, so the number used to test you can be higher than the actual rate plus 3.Step 5: From surplus to maximum loan
With income, expenses and commitments settled, the lender is left with a monthly surplus. It then works out the largest loan that surplus could repay at the assessment rate over the loan term. This is the same amortisation arithmetic behind any repayment calculator, run in reverse: instead of asking “what's the repayment on this loan?”, the bank asks “what's the biggest loan this repayment could service?”Step 6: Checks beyond serviceability
Serviceability is only one gate. A lender will usually also consider:A worked example (illustrative only)
These figures are simplified and hypothetical. They are not rates, lender policies, a typical surplus or a forecast. Suppose a lender concludes that a household has $4,000 a month available to service a new loan after income, expenses and existing commitments. The loan would be a 30-year, principal-and-interest home loan with a hypothetical actual rate of 6.00%.| Test rate | Rate | Repayment per $100,000 | Loan $4,000 a month supports |
|---|---|---|---|
| Actual rate (not how banks test) | 6.00% | about $600 | about $667,000 |
| Assessment rate (actual + 3 points) 9.00% | about $805 | about $497,000 |
| Input | What the rules say | Where lenders differ |
|---|---|---|
| Assessment rate | ADIs must test at least 3.0 percentage points above the product rate (APRA, APS 220) | Own margins and floor rates; which product rate is used |
| Bonus, overtime, rental and other non-salary income | APRA guidance (APG 223): prudent ADIs would generally discount most non-salary income by at least 20 per cent | The size of the discount, the history required and what counts |
| Living expenses | Reasonable inquiries required; benchmarks can't replace them (APRA, ASIC) | Which benchmark is used and how it is compared with your statements |
| Credit cards, BNPL, HELP | No fixed percentage set by regulators | How much of a limit is counted and how other commitments are assessed |
| Policy exceptions | Allowed only if limited and prudently managed | Whether, and when, a lender will consider one |
