Why You Can Borrow Less Than You Think — And What to Do About It

Your income looks good, your expenses seem manageable, and you're ready to buy. Then the bank comes back with a maximum borrowing capacity that feels way lower than expected.

Sound familiar?

It's not random. There's a very specific way lenders calculate what you can borrow — and once you understand it, it makes a lot more sense. It can also help you work out what to do next.

It Starts With the Assessment Rate

When you apply for a home loan, the lender doesn't assess you at the actual interest rate you'll be paying. They assess you at a higher rate called the assessment rate or buffer rate.

Most lenders apply a buffer of 3% on top of your actual loan rate. So if your loan rate is 6%, they'll check whether you could still afford the repayments at 9%.

This buffer exists to protect you. If rates rise after you take out the loan, the bank wants to know you can still make the repayments. Fair enough in principle — but it has a real impact on how much you can borrow.

The higher the assessment rate, the lower your maximum borrowing capacity. It's as simple as that.

How Lenders Calculate Your Living Expenses

Here's where it gets interesting — and where a lot of people get caught off guard.

When assessing your loan, lenders look at your living expenses. But they don't just take your word for it. They compare what you say you spend against a benchmark called the Household Expenditure Measure, or HEM.

The HEM is a standardised estimate of what a household like yours is expected to spend — based on your income and your family size. It covers things like groceries, utilities, transport, insurance, and general living costs.

Here's the catch: lenders use whichever figure is higher — your declared expenses or the HEM. So if you tell the bank you spend $3,500 a month but the HEM for your household type says $4,200, they'll use $4,200 in their calculations.

And here's what's changed in recent years — the HEM has gone up. Cost of living increases have pushed the benchmark higher, which means lenders are assuming you spend more, even if your actual lifestyle hasn't changed much. That directly reduces what they'll lend you.

On top of the HEM, some expenses are assessed separately and added on top. Things like private health insurance, private school fees, and other declared expenses can be added to the HEM figure rather than being included within it. So if you have kids in private school or you're paying for health cover, your total living expense figure used by the lender can end up higher than you might expect.

What Else Do Lenders Look At?

Beyond your income and living expenses, lenders will also factor in -

Your existing debts. Credit cards, personal loans, HECS/HELP debt, and buy now pay later facilities all count — even if you pay them off every month. A $10,000 credit card limit can reduce your borrowing capacity by more than you'd expect.

Your dependants. Each child or dependant increases the HEM estimate and reduces your borrowing capacity. If you've read our earlier post on how having kids changes your borrowing capacity, you'll know this can be significant.

Your employment type. PAYG employees are the easiest to assess. If you are casual, on a contract, earn overtime or bonuses lenders may require more documentation and may be more conservative or take a percentage of your income.

Your loan structure. Interest-only loans, investment loans, and certain lender types all have different assessment models. Some lenders are genuinely more generous than others — which is one of the biggest reasons working with a broker matters.

Why Getting Declined at One Bank Doesn't Mean You're Stuck

Every lender has a slightly different serviceability models. Different HEM figures, different treatment of certain income types, different buffers on existing debts.

That means a borrower who gets declined by one bank might be approved by another — not because the second bank is less responsible, but because their policy differs.

This is exactly why we work with a wide panel of lenders rather than just one. We can compare how different lenders will assess your specific situation and find the one that's most likely to give you the result you're after.

Struggling to Refinance? The Buffer Is Probably Why

If you took out your home loan a few years ago and you've been trying to refinance to a lower rate, the 3% buffer could be the thing stopping you.

Here's the problem: you might have a loan at 6.5% that you're comfortably making repayments on, but when you apply to switch to a lower rate, the new lender assesses you at 9.5% — and at that rate, you don't pass their serviceability calculator.

It's a frustrating situation. You're paying your current loan with no problem, but you can't get approved to pay less.

There are some options for borrowers in this position. Certain lenders offer what's called a like-for-like refinance, which can allow assessment at a reduced buffer — or in some cases, a 0% buffer — provided the new loan has a lower rate and lower repayments than your current one.

We've written about one of these options in detail — the Zeus Bolt Refinance. It won't suit everyone, but if the standard servicing buffer has been blocking your refinance, it's worth understanding your options.

What Can You Actually Do About It?

If your borrowing capacity isn't where you need it to be, there are some practical steps worth looking at before you apply.

Reduce your credit card limits. You don't need to close them, just reduce the limits. Even unused credit counts against you — a $15,000 limit you never touch still reduces what a lender will offer you.

Close your buy now pay later accounts. Afterpay, Zip, Humm — lenders treat these as liabilities even if you don't use them.

Consolidate high-repayment debts into your home loan. Personal loans and car loans often have short terms and high monthly repayments, which can significantly reduce your borrowing capacity. Rolling these into your home loan spreads the repayment over a longer term, which lowers your monthly commitments and frees up serviceability. It's worth having a conversation about whether this makes sense for your situation.

Look at a 35-year loan term. Some lenders now offer loan terms up to 35 years. A longer term means lower minimum repayments, which improves how your loan is assessed. You can always make extra repayments once you're in the loan — but having a lower minimum can make a real difference at the application stage.

Check your HECS/HELP debt. HECS is one of those debts that quietly eats into your borrowing capacity — lenders deduct the repayment from your usable income. What a lot of people don't know is that some lenders will now exclude your HECS debt from their calculations if it's projected to be repaid within 12 months. If you're close to paying yours off, this could be worth timing carefully.

Time your application around your income. If you're self-employed, waiting until after a strong tax year is lodged can make a meaningful difference to how much income lenders will use. If you've recently had a pay rise, some lenders will use your new salary immediately with a payslip.

Talk to a broker before going to a bank. A broker can model your borrowing capacity across multiple lenders before anything gets lodged — and before any credit enquiries show up on your file. Different lenders treat debts, income types, and living expenses differently, and knowing which lender suits your situation before you apply can save a lot of time and stress.

Want to Know What You Can Actually Borrow?

The best way to understand your borrowing capacity is to talk it through with someone who works with multiple lenders every day and knows how each one assesses your situation.

That's exactly what we do.

Get in touch today and let's work out where you stand.