How to Boost Your Borrowing Capacity in 2025

Thinking about buying a home, refinancing or stepping into property investment this year?

Before you get started you need to know your borrowing capacity, right?

But it’s not as simple as it sounds. In today’s blog we cover:

How do lenders work out your borrowing capacity?
Why lenders stress-test your budget with a 3% rate rise on current and future debts
How lender policies vary significantly and how to find the lender that is right for you
The impact of cutting down your living expenses on your borrowing power
Practical tips for reducing your living expenses without sacrificing your lifestyle

How do lenders work out your borrowing capacity?

Most people understand that your borrowing capacity refers to the amount a lender is willing to lend to you.

What’s less clear is why this amount can vary so much between lenders.

The key reason behind these differences is that everyone’s financial situation is unique and each lender uses their own set of policies and calculations to assess your borrowing power.

While it may sound simple at first glance, borrowing assessments often involve a number of variables and the numbers lenders use might not match what you expect.

The main areas assessed include:

Your guaranteed income or base salary
Variable income such as commissions, bonuses and overtime
Living expenses
The number of children and dependents you have
Repayments on your existing debts
Credit card limits
Employment type, such as: permanent, part-time, casual, contract or self employed
Employment history and stability, such as: the time in your current role
Occupation, for example: professional, tradie, public servant, etc

All these factors go into determining how your profile aligns with the lender’s policies.

That’s why the actual borrowing calculation is usually more complex than it seems.

For example, just because you earn $150K a year doesn’t mean a lender will consider all of it.

Starting with income, lenders will typically assess:

Your base salary
Commissions and bonuses
Overtime
Rental income
Dividends
Family Tax Benefits
Secondary job income

But not all income is treated equally.

Lenders may apply shading, where certain types of income (like bonuses or rental income) are reduced by 20–50% — or excluded altogether.

They’ll calculate your net income after tax, not your gross income, which makes sense since you don’t actually keep the full amount of your gross earnings.

They will typically consider tax deductions, particularly for investment properties.

Most people have a combination of variable income and different work arrangements or employment contracts, all of which impact how lenders assess their borrowing capacity.

While an online calculator can give you a ballpark figure, it often won’t accurately reflect your true borrowing potential with a lender because:

It doesn’t take into account the unique aspects of your financial situation
Borrowing capacity can vary significantly from one lender to another

Why lenders stress-test your budget with a 3% rate rise on current and future debts

Lenders will take into account all of your existing debts, including:

Home or investment loans
Car finance or personal loans
Credit cards
HECS/HELP
Child or spousal maintenance
Buy now, pay later arrangements

Lenders will also apply a 3% interest rate buffer on both your existing and new loans. That means if your interest rate is 6%, they’ll assess your repayments as if it were 9%. This is a regulatory safeguard to make sure you could handle a rate rise (or a few!)

We suggest ensuring you have at least $1,000 in monthly surplus cash flow after your new mortgage repayments. Your desired surplus cash flow after purchasing should be the key factor in determining your purchase price, rather than relying solely on what a calculator says you can borrow.

Another factor is the remaining term on any current debts. If you only have a couple of years left on a car loan, lenders will factor in the higher monthly repayments over that shorter term — which can reduce your borrowing power. In situations like this, it may be beneficial to pay off your car loan or HECS debt before applying for a home or investment loan to improve your borrowing capacity.

How lender policies vary significantly and how to find the lender that is right for you

One of the biggest (and often overlooked) elements that impact your borrowing capacity is lender policy.

Every lender has its own approach — what income they accept, how they treat certain professions, how much risk they’re comfortable with and much more.

Some are more flexible with rental income.

Others are better suited for self-employed applicants.

Some prefer borrowers in certain industries.

Lender policy is like a legal framework and it changes constantly.

Top quality mortgage brokers stay on top of these changes more closely than others, allowing them to match you with the right lender.

There are over 40 or 50 lenders out there.

Why limit yourself to one bank and hope for the best?

Working with a strategic mortgage broker who understands these policies can make a significant difference.

The impact of cutting down your living expenses on your borrowing capacity

Yes, and the numbers speak for themselves.

Lenders look closely at your living expenses. These fall broadly into two categories:

Primary expenses – essentials like groceries, rent, utilities, transport and personal care
Discretionary expenses – things like takeaway, streaming services, subscriptions, holidays and entertainment

Discretionary spending is where most people have room to adjust and lenders know that.

Real-World Examples: How Spending Impacts Your Borrowing Power

Single earning $150K
Home buyer
no debts or dependents
80% LVR

How living expenses affect borrowing capacity for singles

Couple earning $300K (combined)
Home Buyer
No debts or dependents
80% LVR

How living expenses affect borrowing capacity for couples

The increase in borrowing capacity from reducing your living expenses can be quite substantial.

Even modest changes like cutting back on discretionary spending can translate to tens or even hundreds of thousands of dollars in additional borrowing power.

Practical tips for reducing your living expenses without sacrificing your lifestyle

It’s all about balance.

Reducing non-essential spending can give you a significant boost — but it needs to be realistic.

You don’t want to make your day-to-day life uncomfortable just to stretch your loan.

Tips to get started:

Review your past 3–12 months of transactions and copy them into a spreadsheet (preferably 12 months so you pick up ALL expenses)
Break them up into categories
Highlight any areas of overspending or unused services
Look for manageable cuts — like takeaway, unnecessary spending such as unused subscriptions or excess clothing
Keep a healthy buffer for lifestyle flexibility or unexpected costs

For more detail, check out Episode 30 – Money Management: 7 Steps to Success.

And remember, just because a lender says you can borrow a certain amount, doesn’t mean you should.

Focus on what’s sustainable for your lifestyle and future goals.

Working with the right strategic mortgage broker can help you navigate the complexity and find the right lender and products to suit your personal situation.