Borrowing power and the 3% serviceability buffer: how lenders decide how much you can borrow
How Australian lenders assess borrowing power with APRA's serviceability buffer, living expense benchmarks, credit card limits and debt-to-income limits, with a worked example.
Australian lenders do not ask whether you can afford the repayment at today's rate. They ask whether you could still afford it if rates were at least 3 percentage points higher, which is the serviceability buffer APRA expects banks to use. On a loan offered at 6.00%, a bank tests your budget at 9.00% or more. Your borrowing power is roughly the loan whose repayment at that higher rate fits inside your monthly surplus after tax, living expenses and other debts. That is why a credit card you rarely use, or a car loan, can cut your borrowing power by tens of thousands of dollars.
This guide is part of home loan rates and repayments in Australia. Figures are illustrative; each lender's calculator and policy differ.
The rules behind the assessment
- Responsible lending. Under the National Consumer Credit Protection Act 2009, lenders must make reasonable inquiries about your requirements, objectives and financial situation, take reasonable steps to verify it, and assess that the loan is not unsuitable, meaning you could meet the repayments without substantial hardship. ASIC's regulatory guide on responsible lending explains how it expects this to be done.
- Serviceability buffer. APRA's guidance for banks expects a buffer of at least 3 percentage points over the loan rate. APRA raised it from 2.5 to 3 points in October 2021. Non-bank lenders are not regulated by APRA in the same way, and some use different buffers, but they are still bound by responsible lending law.
- Debt-to-income limits. APRA announced in late 2025 that, from February 2026, banks must limit the share of new lending at a debt-to-income ratio of six or more. This is a cap on each bank's lending mix, not a ban on individual high-DTI loans, but it can make such loans harder to obtain. Check APRA's website for the current setting.
Worked example: estimating borrowing power
An illustrative household:
| Item | Monthly |
|---|---|
| Net income after tax (both incomes) | $11,200 |
| Living expenses used by the lender | -$5,100 |
| Car loan repayment | -$650 |
| Credit card limit $15,000, assessed at 3% of the limit | -$450 |
| Surplus available for a home loan | $5,000 |
Many lenders also keep a small margin, so suppose the lender lets $4,800 a month go to the new loan. At an assessment rate of 9.00% over 30 years:
- (1.0075)^-360 is about 0.0679
- (1 - 0.0679) / 0.0075 is about 124.28
- $4,800 x 124.28 = about $596,550
The actual repayment at the 6.00% offer rate on $596,550 would be about $3,577, well below the $4,800 assessed. The gap is the buffer doing its job.
What changes the result:
- Without the buffer, the same $4,800 at 6.00% would support about $800,600. The buffer reduces borrowing power by about a quarter in this example.
- Cancel the $15,000 credit card: surplus rises by $450 to $5,450. Keeping the same $200 margin, $5,250 a month at 9% supports about $652,500, an extra $55,900 or so.
- A 25-year term instead of 30 lowers the maximum to about $572,000.
Living expenses: declared versus benchmark
Lenders ask you to declare your expenses and check them against bank statements. Many also compare them with a benchmark such as the Household Expenditure Measure (HEM) and use the higher of the two. If your statements show high discretionary spending, expect the lender to use those figures. Three months of careful spending before applying gives a cleaner picture.
Expenses lenders commonly look for:
- rent or board until settlement, utilities, insurance, council rates and strata
- groceries, transport, phone and internet
- childcare, school fees, child support
- Buy Now Pay Later, subscriptions, gym memberships
- HELP debt repayments, which reduce take-home pay
Debt-to-income: the second test
For example, a $600,000 home loan, a $25,000 car loan and a $15,000 card limit against $110,000 of gross income is $640,000 / $110,000, a DTI of about 5.8. Above 6, some lenders tighten policy or ask for a lower LVR.
How to improve your borrowing power
- Reduce or close credit limits you do not need. Lenders assess the limit, not the balance.
- Pay off or refinance small debts where it saves more than it costs.
- Show stable income. Two recent payslips for employees; two years of tax returns and notices of assessment for most self-employed borrowers.
- Check your credit report with Equifax and Experian (illion was acquired by Experian in 2024). You can get a free copy from each every three months.
- Make the deposit bigger. It does not change the buffer, but a lower LVR widens your choice of lenders.
- Do not borrow the maximum just because you can. Test the real repayment at a rate 2 points higher with the rate rise stress test.
Frequently asked questions
Does the buffer mean my rate will be 3% higher?
No. The buffer is only used to test affordability. You pay the rate in your contract.
Do refinancers face the buffer too?
Generally yes. A new lender assesses you as a new borrower, which can trap people whose income has fallen. Your existing lender can reprice your loan without a full new assessment, so ask it for a lower rate first; see asking for a rate cut.
Why do online calculators give different answers?
Each lender uses its own expense benchmarks, buffer, treatment of overtime, bonuses and rental income, and credit card assessment rate.
Can a broker find a lender that lets me borrow more?
Brokers know lender policies, but they must act in your best interests, which is not the same as maximising the loan.
Sources
- APRA — serviceability buffer and debt-to-income settings
- ASIC — responsible lending obligations
- ASIC Moneysmart — budgeting and borrowing power
- OAIC — your rights to access and correct credit reports
