Buying your first home is one of the most exciting moments of your financial journey, but it can also be one of the most misunderstood. Many first-home buyers spend years saving for a deposit, only to discover that their first-home buyer borrowing capacity doesn’t always match expectations.
A strong income helps, but it’s not the whole picture. Lenders look beyond your pay to understand how you manage money, your stability, and your ability to adapt if rates rise or your lifestyle changes.
At Unconditional Finance, we help first-home buyers in Sydney and Melbourne understand how borrowing power may be calculated, what lenders typically look for, and how to prepare cautiously for a first-home loan.
What Borrowing Power Really Means
Your borrowing power is an estimate of what you may be able to borrow under a lender’s affordability model. It is not a target or a guarantee, and it depends on the lender’s policy at the time.
Each lender performs a serviceability assessment to calculate your home loan borrowing power. This means they test your ability to repay by analysing your income, regular expenses, and total financial commitments, all under an assumed higher interest rate.
In Australia, many lenders apply a serviceability buffer above your actual rate (often around 3%, though some lenders may use a different buffer from time to time). This is to test whether repayments could still be met if rates rise. For example, a quoted rate of around 5.8% might be assessed at roughly 8.8%, depending on the lender and policy at the time.
These rules align with the National Consumer Credit Protection Act (NCCP) and ASIC’s responsible lending obligations, which require lenders to ensure loans are suitable and sustainable.
Because lenders use different models, expense assumptions and income treatment, outcomes can vary widely for the same borrower. Small changes in interest rates or policy can also shift borrowing capacity.
Common Borrowing Power Myths (and the Realities Behind Them)
Many first-home buyers start their journey with ideas they’ve heard from others. Unfortunately, some of these beliefs can lead to disappointment or unrealistic expectations. Let’s separate the myths from the facts.
Myth 1 – “Online calculators show exactly what I can borrow.”
Online calculators are useful for a quick estimate, but they simplify complex lending formulas. They often assume benchmark living costs, standard tax settings and a generic interest buffer that may not match your situation.
Real lender assessments are more detailed. Lenders verify income and review bank statements and declared spending, and may adjust for family size, credit limits and other factors. Even small differences in these factors can produce large gaps in outcomes.
For example, one lender might estimate around $750,000 while another, using different expense benchmarks or a higher buffer, might assess closer to $680,000 (illustrative only). Both are correct under their respective models.
Online results should always be seen as an indication, not a promise. A mortgage broker for first-home buyers helps navigate lender differences and structure your application effectively.
Myth 2 – “Pre-approval means I’m guaranteed that loan amount.”
Pre-approval (often called conditional approval) is a positive step, but it is not final approval. It’s based on the information you provided and the conditions set by the lender at that time.
It can change if:
- Your income, debts, or job situation shifts
- Interest rates rise, affecting assessment buffers
- The property’s valuation comes in lower than the purchase price
- New liabilities, such as a car loan or Afterpay, appear on your credit file
Final approval only happens once the lender reassesses everything after you’ve chosen a property. To keep your pre-approval valid, avoid big financial changes and keep documents updated until settlement.
Myth 3 – “All income counts the same.”
Not all income is treated equally. Many lenders count 100% of base salary, but only a portion of variable income (for example, bonuses, commissions, allowances or overtime), often averaged over time.
They might average these over several months or use the lowest recent figure for consistency. For casual or contract work, some lenders may require longer income histories and may average earnings (for example, over 6–12 months), while others may take a different approach. It’s case by case.
Lenders also shade rental income, with some using around 70% to 80% of gross rent to allow for costs and vacancy (exact percentage varies by lender). Dividend income or trust distributions are only accepted if they appear consistently in tax records.
Understanding how lenders apply these discounts can prevent delays and help avoid common mortgage mistakes during assessment.
Myth 4 – “Having no debt means I’ll automatically qualify for more.”
Having no debt certainly helps your profile, but borrowing power depends on more than debt levels. Lenders test affordability using your declared living expenses and a benchmark such as the Household Expenditure Measure (HEM). The higher of the two is usually applied.
If your actual spending exceeds the benchmark, lenders will use the higher figure. This means even applicants with no loans can be limited if their lifestyle costs are high compared to their income.
In practice, lenders want to see responsible money management, not just the absence of debt. Demonstrating steady savings habits and controlled spending patterns often counts more than a zero-debt balance.
Myth 5 – “Self-employed buyers can’t borrow much.”
This is one of the most persistent misconceptions. In reality, many self-employed Australians qualify for competitive home loans when they can show consistent income and business performance.
Many lenders request one to two years of personal tax returns and business financials. Some may use the lower of the two years; others may consider the most recent year if income is stable or trending up. Requirements vary.
For newer businesses or fluctuating income, some lenders offer low-doc or alt-doc options that may use BAS statements, business bank records or an accountant’s letter. Availability and criteria vary by lender and can change.
Myth 6 – “Borrowing the maximum is the smartest move.”
Your approved limit is a guideline, not a goal. It represents the highest amount the lender believes you can repay under stress conditions, not necessarily what fits comfortably into your everyday budget or aligns with your home loan borrowing power goals.
Borrowing less can give you flexibility for rate changes, property expenses, or future plans such as starting a family or travelling. A smaller, well-structured loan can make your home ownership journey smoother and less stressful in the long term.
Myth 7 – “Switching lenders won’t change my borrowing capacity.”
It often does. Every lender uses different assessment rates, risk tolerances, and income treatments. One bank might accept a higher percentage of overtime or rent, while another could be more cautious about casual employment or credit limits.
These differences can shift assessed capacity materially. A broker can compare policies and calculators first and then help you apply with a single credit enquiry.
How Lenders Actually Calculate Borrowing Power
Each lender’s model follows the same logic: test income, adjust for risk, subtract expenses, and confirm affordability. But within that framework, the differences can be substantial.
Below is a general outline of how Australian lenders may determine borrowing power. Details vary by lender.
1. Income and verification
Lenders begin by confirming all income sources through payslips, tax returns, or bank statements. Base salary is often counted in full. Variable income (such as overtime, commissions or allowances) may be discounted or averaged, depending on policy.
Rental income is commonly shaded to 70% to 80% of gross rent, though some lenders use different rates. Government payments like Family Tax Benefit or parental leave may count if they’re ongoing and documented.
For self-employed borrowers, lenders use business financials or personal tax returns to establish consistent, sustainable income.
2. Employment stability
Employment history plays a big role in risk assessment. Most lenders look for at least three to six months in your current role, or two years in the same industry.
Contractors and casual workers may need to show longer consistency or multiple renewed contracts. Lenders also check probationary status; while being on probation doesn’t automatically disqualify you, some lenders prefer probation to be completed before formal approval, while others may proceed with additional verification.
3. Living expenses and lifestyle
Every borrower must declare regular spending across essential and discretionary categories. Essentials include groceries, transport, insurance, and utilities; discretionary costs include entertainment, dining out, or travel.
Lenders cross-check your declared budget with your last three months of bank statements and the national HEM benchmark. They use the higher number to ensure your loan remains affordable even if spending fluctuates.
Transparency is vital. If your statements don’t match your declared budget, the lender may recalculate or ask for clarification, which can slow the process.
4. Debts and credit commitments
Existing credit facilities directly reduce borrowing power. Credit cards, even with zero balances, are assessed on their full limits because they represent available debt.
Personal loans, novated leases, and student loans such as HELP or HECS are included in monthly commitments. If you have buy-now-pay-later accounts or small debts, consider closing or paying them off before applying. Just ensure you maintain sufficient savings to avoid appearing overextended.
5. Dependants and future obligations
The number of dependants increases the expected household cost and reduces available income for loan servicing. Lenders adjust HEM figures accordingly.
They may also assess upcoming financial changes, such as parental leave, additional childcare, or future schooling costs, to ensure your loan remains affordable over time.
6. Loan term and structure
A longer loan term (for example, 30 years instead of 25) can lower monthly repayments and slightly boost borrowing capacity, but it increases total interest over the life of the loan.
Lenders also differentiate between principal-and-interest (P&I) and interest-only (IO) structures. Interest-only may provide short-term flexibility, but total affordability is assessed over the shorter remaining principal period once the IO ends.
7. Assessment buffers
Many lenders apply a buffer (often around 3%) to test affordability at a higher rate. For instance, a rate of 5.8% might be assessed at about 8.8%, depending on the lender.
This ensures you could continue repaying comfortably if rates climb or your income drops. It’s one of the most influential factors affecting borrowing capacity, especially when rates change quickly.
8. Internal credit policy
Each lender has internal guidelines that go beyond public information. These policies include acceptable loan-to-value ratios (LVRs), property types, and minimum credit scores.
For example, a major bank might cap certain property types, while a smaller lender could be more flexible. These behind-the-scenes rules often explain why two similar borrowers receive different borrowing limits.
9. Responsible lending checks
Before approval, lenders confirm your details through document verification, valuation, and a credit report review. These checks aren’t meant to create barriers but to ensure your loan stays sustainable throughout its term.
The goal is simple: to help borrowers avoid financial stress and maintain home ownership comfortably, even when circumstances change.
Borrowing Power for Self-Employed, Contract, or Irregular Income Earners
Many Australians work outside traditional employment, and lenders have adapted to assess income more flexibly.
Self-employed borrowers may be assessed using one to two years of tax returns or, with some lenders, BAS summaries. Contractors may be assessed on contract history and income regularity (for example, 6–12 months), and casual workers are assessed based on the consistency of hours and income. Requirements vary by lender.
Matching your documents to the right policy can improve results under current low-doc lending criteria.
How Lifestyle and Future Changes Affect Borrowing Power
Lenders don’t just assess your finances as they are; they consider where they’re heading. Starting a family, taking time off work, or moving to part-time hours can all affect affordability.
Even relocations that increase commuting or childcare costs are factored in. Planning for these ahead of time helps you borrow responsibly without stretching your budget too thin.
How to Strengthen Your Borrowing Power Safely
There’s no single trick to increasing borrowing power, but preparation matters. You can:
- Reduce unused credit card limits.
- Pay down short-term debts.
- Show consistent savings behaviour over time.
- Keep stable employment and avoid unnecessary job changes.
- Track spending and stay within realistic budgets.
- Avoid large new purchases before applying.
- Work with a Sydney mortgage broker early to compare lender calculators and policies.
Comparing options early helps prevent unnecessary reapplications and highlights why many consumers are turning to brokers to find sustainable, tailored lending options.
The Role of a Mortgage Broker in Maximising Borrowing Potential
A broker’s role is to navigate lender differences and structure your application effectively. We analyse how each lender treats income types, debts, and spending patterns to match you with those most aligned to your goals.
As a mortgage broker for first-home buyers, we have access to a broad panel of lenders. This allows us to model multiple scenarios and show how small changes, like adjusting a loan term or credit limit, can affect your borrowing power.
You can explore the differences further in our comparison of mortgage brokers versus direct lenders.
Why Borrowing Less Can Be the Smarter Move
Borrowing slightly below your maximum limit gives you financial freedom and peace of mind. It leaves room for future plans and cushions you against rate movements or job changes.
Borrowing less may help reduce interest costs and can improve flexibility for future plans such as upgrading, investing or refinancing a loan. Sustainable borrowing power isn’t about pushing boundaries; it’s about creating financial stability that lasts.
Borrowing Power Is Personal
Every borrower’s situation is unique. The right loan depends on your income pattern, lifestyle, and future plans, not on generic online tools.
By understanding how lenders think, you can plan clearly, borrow wisely, and stay confident throughout the buying process.
If you’d like to understand how lenders might view your situation, our mortgage brokers in Sydney can compare policies and guide you through your next steps with transparency and care.
Plan First, Then Apply
Knowing your borrowing power early helps you set realistic goals and approach your first purchase with confidence. By preparing documents, reviewing your expenses, and comparing lender policies ahead of time, you can enter the property market on solid ground.
Planning carefully with a broker ensures your home loan remains sustainable today and in the years ahead.
If you’d like to see what options may be available for your situation, our mortgage brokers in Sydney can help you compare policies and guide you through the next steps.
Disclaimer: The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention are taken in its preparation, any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances. Terms, conditions, fees and charges may apply. Normal lending criteria apply. Rates are subject to change. Approved applicants only.
Frequently Asked Questions (FAQs)
Yes, it can. Some lenders may offer different assessment rates or product options based on credit history, and a weaker score might reduce the amount offered or require stronger overall settings. Checking your file for errors and making repayments on time usually helps.
Mostly it reduces LVR and any LMI cost, which improves overall affordability. A lower LVR can also place you in a lender’s more favourable pricing tier, which may improve assessed capacity because repayments are lower. Exact impacts vary by lender policy.
Government programs, like the 5% Deposit Scheme, typically reduce the deposit or LMI needed rather than change serviceability. Your borrowing capacity is still assessed under the lender’s normal rules and buffers. Eligibility and places are limited and may change without notice.
Usually not directly. Most lenders assess at a buffered assessment rate regardless of whether the loan is fixed or variable, so capacity is similar either way. Product features and pricing can still influence overall affordability.
A co-borrower may increase assessed capacity if the combined income exceeds the combined expenses and debts. A guarantor usually helps with deposit and LVR, not serviceability, so it may not change the assessed amount.
Not always. Some lenders may accept applications during probation if your industry experience is strong and your income is stable, while others prefer you to pass probation first. Policies differ, and documents confirming role and income are usually required.
They can affect the maximum LVR rather than the serviceability number. High-density apartments, very small units, or certain postcodes may attract tighter LVR caps with some lenders, increasing the deposit you need. Unconditional Finance can explain how a specific property type might be treated without giving personal advice.