How Much Can You Borrow? Understanding Borrowing Capacity in 2026
Your borrowing capacity is the maximum a lender will approve based on your income, expenses, existing debts, and financial commitments. It’s not a fixed number, every lender calculates it differently, and following three cash rate increases in 2026, what most Australians can borrow has shifted considerably from where it sat 12 months ago.
Whether you’re buying your first home, upgrading, or looking at an investment property, understanding what drives your borrowing capacity, and what you can do to improve it, puts you in a much stronger position before you start talking to lenders.
What Is Borrowing Capacity?
Borrowing capacity (sometimes called borrowing power) is the maximum loan amount a lender will approve for you, based on your financial position. Lenders calculate it using your gross income, your regular living expenses, any existing debts, and the number of dependants in your household. Most lenders also apply a standardised living cost benchmark called the Household Expenditure Measure (HEM) to estimate your minimum living costs.
The HEM is derived from ABS Household Expenditure Survey data and represents a modest but acceptable standard of living across Australian households. If your declared expenses sit below HEM, lenders apply HEM as a floor. If your actual expenses are higher, they use those instead.
What surprises many borrowers: the same person applying to five different lenders can receive five very different borrowing capacity figures, sometimes varying by $100,000 or more. That’s because each lender weights income, expenses, and liabilities differently within their own credit policy.
What Factors Affect How Much You Can Borrow?
Six factors drive your borrowing capacity: your income, your living expenses, your existing debts, the number of dependants in your household, your employment type, and your credit history. Improving any one of these can move your borrowing capacity in a meaningful way.
Here’s how each one works in practice:
- Your income. Lenders look at your gross income, before tax, including salary, rental income, and depending on the lender, bonuses, overtime, and certain government payments. If you’re self-employed, most lenders average your taxable income over two years, which can sit below your actual earnings.
- Your living expenses. Lenders compare your declared expenses against the HEM benchmark and use whichever is higher. Regular commitments like childcare, private school fees, and subscription services all count. Your bank statements from the past three to six months are the primary evidence.
- Your existing debts. Every liability reduces your capacity. A $10,000 credit card limit reduces your borrowing capacity by roughly $40,000 to $50,000, even with a zero balance, because lenders treat the full limit as debt you could draw at any time. Personal loans, car loans, and HECS-HELP debt all reduce your capacity further. Our article on how HECS affects home loan applications covers the student debt impact in more detail.
- Your dependants. Each dependent child typically reduces your borrowing capacity by $20,000 to $30,000, as lenders account for the cost of raising children through their expense benchmarks.
- Your employment type. PAYG employees with at least two years in the same role are assessed most favourably. Casual employees, contractors, and self-employed borrowers face more scrutiny, with most lenders requiring two years of income history before including variable components.
- Your credit history. Missed payments, defaults, or multiple credit enquiries in a short period can reduce what you’re offered or affect which lenders will consider you at all. Knowing your credit score before you apply is a practical first step.
Here’s how the main factors tend to move your borrowing capacity:
Factor | Reduces capacity | Improves capacity |
Credit card limits | Yes – even unused limits count | Close or reduce limits before applying |
Personal / car loans | Yes – full balance counts | Pay down or clear before applying |
HECS-HELP debt | Yes – reduces net income | Repayments reduce over time |
Number of dependants | Yes – each adds to assessed expenses | N/A |
Employment type | Casual / contract: more scrutiny | PAYG 2+ years: most favourable |
Declared living expenses | Higher expenses = less capacity | Lower expenses = more capacity |
Credit enquiries | Multiple in short period = red flag | Limit applications before you’re ready |
How Have Rate Rises Affected Borrowing Capacity?
Following three cash rate increases in 2026, borrowing capacity across Australia has tightened significantly. The cash rate now sits at 4.35% (as of July 2026), but that is not the rate lenders assess you against. APRA requires lenders to test your ability to repay at your actual interest rate plus a minimum 3% serviceability buffer. With most owner-occupier rates currently sitting between 5.89% and 6.49%, that places the assessment rate for many borrowers between roughly 8.89% and 9.49%.
The real-world impact is substantial. On a $600,000 loan over 30 years, the difference between being assessed at a 5% rate versus 7.35% can reduce your maximum borrowing capacity by $100,000 or more, depending on your income and liabilities.
At its June 2026 meeting, the RBA held the cash rate unchanged at 4.35%, the first pause after three consecutive increases. While that hold brings some stability, borrowers can now plan with more confidence about where their capacity sits right now, rather than chasing a moving target. The next RBA decision is due 11 August 2026.
According to APRA’s quarterly lending data, new home loan commitments have moderated alongside the rate rises, consistent with a tighter borrowing environment across the market.
Can You Increase Your Borrowing Capacity?
The most effective steps are reducing existing debts, closing unused credit cards, and lowering your regular living expenses before you apply. Even modest changes can shift the number meaningfully. Paying off a $15,000 personal loan before applying, for example, could increase your borrowing capacity by $60,000 or more.
Five practical steps that make a real difference:
- Close credit cards you don’t use. Contact your provider and close the account before you apply. A zero-balance card with a $10,000 limit still costs you significant borrowing capacity.
- Reduce credit card limits. If closing a card isn’t practical, ask your provider to lower the limit. A smaller limit means a smaller assumed liability.
- Pay down personal and car loans. Reducing your outstanding liabilities frees up income in the lender’s serviceability calculation. If you’re carrying multiple high-rate debts, debt consolidation may be worth exploring before you apply.
- Review buy now pay later accounts. Afterpay, Zip, and similar services appear on your bank statements and are increasingly factored into expense assessments. Close accounts you don’t need before applying.
- Give yourself a clean run-up. Lenders look at three to six months of bank statements. Reducing discretionary spending in the months before you apply gives you a cleaner financial picture to present.
Why the Lender You Choose Matters
Different lenders use different models to calculate borrowing capacity, and the gap between them can be significant. One major bank might offer you $650,000 while another approves $720,000, for the same income, the same debts, and the same deposit. The difference comes down to how each lender’s credit policy treats your income type, your employment situation, and your existing liabilities.
A broker compares your position across 30+ lenders and identifies which credit policy best fits your circumstances. According to MFAA data, mortgage brokers now write 74.1% of all new residential home loans in Australia, one reason is that borrowers with different income types or financial situations consistently find a better fit when they compare across a wider range of lenders.
This is particularly relevant right now. With rates paused, your borrowing capacity is a known quantity, at least until the August decision. That makes now a practical time to get a pre-approval in place, so you know your exact position before you start looking.
Use our calculator hub for a preliminary estimate, then book a conversation with our team to confirm your actual position across the lender panel.
Frequently Asked Questions
Borrowing capacity is the maximum loan amount a lender will approve based on your income, expenses, existing debts, and household circumstances. It varies between lenders, sometimes by $100,000 or more for the same borrower. A broker compares your position across multiple lenders to find the one whose assessment model best fits your situation.
APRA requires lenders to assess your ability to repay at your actual interest rate plus a 3% serviceability buffer. When the cash rate rises, that assessment rate rises with it. Following three increases in 2026, most borrowers are now being assessed at rates above 7%, which has compressed borrowing capacity across the market compared to 12 months ago.
Yes. HECS-HELP repayments reduce your effective net income in the eyes of lenders, which reduces the loan size they’ll approve. The impact depends on your remaining balance and income level. Your broker can work through the specific effect on your situation.
The fastest improvements typically come from closing unused credit cards, paying down personal loans, and reducing your regular living expenses in the months before applying. Your broker can review your current position and advise on which changes will have the most impact for your specific circumstances.
A broker can give you a preliminary estimate within a single conversation, based on an overview of your income and liabilities. A formal pre-approval, which is lender-verified and gives you a more reliable and confirmed figure, takes longer and requires supporting documents, but gives you a solid foundation to act from.
Disclaimer
This article is general information only and does not constitute financial advice. Your personal circumstances may differ. Talk to your broker about your specific situation.
Sources: APRA Quarterly ADI Performance Statistics; MFAA Industry Intelligence Report; Reserve Bank of Australia, Monetary Policy Decision, June 2026; ABS Household Expenditure Survey.
