What Reduces Your Borrowing Power? Expenses, Debts and the Buffer

The short answer

Three things reduce how much you can borrow: your living expenses, your existing debts, and the buffer lenders add to test you against higher rates.

Some of these you can’t change. Many you can, and every lender treats them a little differently. Understanding each one is the first step to borrowing more, or borrowing smarter.

Living expenses

• The usual rule: lenders use whichever is higher, your declared living expenses or HEM (the Household Expenditure Measure). HEM is a benchmark based on household size, income and location.
• Bank statements matter: lenders usually review around three months. Heavy discretionary spending, gambling or Buy Now Pay Later can count against you.
• Some costs sit on top of HEM: private school fees, childcare and some insurances are often added on top of the benchmark.
• Shared rent: some lenders count the full lease cost even if you split it with housemates. Others are fairer and only count your share.

Example: A couple with two kids declares $3,500 a month in living expenses, but HEM for their household is $4,200. Most lenders will use $4,200, even though they genuinely spend less.

Be upfront about your expenses. Lenders check your bank statements, so under-declaring rarely works. It can get your application declined and damage your credibility with the lender. Declare honestly, and look for legitimate ways to reduce your spending before you apply instead, like cancelling unused subscriptions, cutting back on takeaway, or reviewing your insurance and utility plans. Genuinely lower spending shows up in your statements and works in your favour.

Changing plans can work for or against you

Lenders must consider changes you can reasonably foresee, not just what you spend today.

• Against you: future costs must be included, like private school fees for a child starting next year.
• For you: costs that are about to end can be removed. If your child finishes private school this year and starts uni next year, those fees can come out of the assessment.

Example: Sarah and Ben pay $25,000 a year in private school fees, and their daughter graduates this December. A lender that removes those fees frees up about $2,000 a month in the assessment, which can lift their borrowing power considerably.

Existing debts

• Credit cards: lenders assess the limit, not the balance. They assume a monthly repayment of around 3–3.8% of the limit, even if the card has a $0 balance, you never use it, or you pay it off in full every month.
• Car and personal loans: your actual repayments count against you. Some lenders also apply a buffer to them.
• HECS/HELP: usually your compulsory repayment comes out of your income in the assessment, but there’s flexibility. Some lenders can ignore it if it will be paid off within a year, or if the balance is under a certain threshold. We can help you find the best strategy for your situation.
• Buy Now Pay Later: limits on accounts like Afterpay can count as debt, even with a zero balance.

Example: Emma has a $20,000 credit card she never uses. At 3.8%, a lender treats it as a $760 monthly commitment. Cancelling it could add around $95,000 to her borrowing power.

The serviceability buffer

• The standard rule: lenders test whether you could afford your repayments if rates rose 3% above your actual loan rate.
• Why it exists: it protects you, and the lender, against future rate rises or changes to your income and expenses.
• Did you know? Some lenders use a blanket 2% buffer, giving you higher borrowing capacity.
• Even lower in some cases: a 1% buffer can be considered in certain situations, including dollar-for-dollar refinances.

Example: on a $600,000 loan at 5.75%, your actual repayment is about $3,500 a month. Here’s what each lender tests you against:

Buffer	Assessed rate	Monthly repayment tested
3%	8.75%	about $4,720
2%	7.75%	about $4,300
1%	6.75%	about $3,890

The lower the buffer, the less income you need to qualify, and the more you can borrow.

Quick wins: free up borrowing power

• Trim your debts: close unused credit cards, reduce limits and clear small loans before you apply.
• Rethink HECS: check whether paying it off, or choosing a lender that ignores it, works in your favour.
• Get your timing right: apply once a cost like school fees is about to end.
• Find the right buffer: lenders with a 2% buffer, or 1% for refinances, can stretch further.
• Look at your structure: a longer loan term or a joint application can lift your capacity.

Excess baggage?

Think of your borrowing power like an airline weight limit. Every unused credit card, Buy Now Pay Later account and stray expense is excess baggage that eats into what you can take with you.

We help you pack light. With access to over 40 lenders, our team of lending specialists cuts through the jargon and complexity so you can focus on the most important part: living your life.

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General information only. This article does not consider your objectives, financial situation or needs and is not credit, financial or tax advice. Lender policies vary and change regularly. Examples are illustrative and rates are hypothetical. Seek advice from a licensed credit adviser before acting. Insight Property Finance.