Determining borrowing capacity is the first real step in the home-buying journey, but it's a bit more scientific than just multiplying your salary by a random number. Many people walk into conversations with lenders or brokers with a figure in their head — often based on what a friend borrowed, or a quick online calculator — only to find that the real answer is very different.
The truth is that lenders use a complex serviceability formula. They look at your gross income, but they also factor in your existing debts, your living expenses (using the Household Expenditure Measure, or HEM, as a benchmark), the number of dependants you have, and any other financial commitments. Then they apply a buffer — typically 3% above the actual interest rate — to stress-test whether you could still afford repayments if rates rose.
Credit cards are a common trap. Lenders don't just look at your outstanding balance; they assess your total credit limit as if it were fully drawn. So a $20,000 credit card limit you never use can still reduce your borrowing power by $100,000 or more. If you're seriously thinking about applying for a home loan, it can be worth cancelling or reducing the limits on cards you don't need.
Income type also matters significantly. Permanent full-time employment is viewed most favourably. Casual, contract, or self-employed income requires additional evidence — usually two years of tax returns — and lenders often apply a more conservative interpretation. Overtime, bonuses, and rental income may only be partially counted, depending on the lender's policy.
At Amber Finance, our role is to give you an honest, accurate picture of your borrowing capacity before you fall in love with a property you can't finance. We work across more than 40 lenders and know which ones will best accommodate your specific circumstances. Book a free consultation today and get a real answer to the million-dollar question.