How Does the Bank Calculate Borrowing Power? (And Why Equity Isn’t Everything)

One of the most common questions we get from clients is: "How does the bank calculate borrowing power?" The answer often surprises people, especially those who have built up significant equity in their property. Take Jasmine, for example. A recently separated mother of two, Jasmine, wanted to refinance and buy out her ex-partner so she could remain in the family home. She had accumulated over 50% equity in the property and assumed that would work in her favour, but her bank still declined her application. It left her confused and frustrated.

Let’s examine how lenders calculate borrowing power and why equity, while useful, is only one part of a much bigger picture.

1. Income Is the Foundation

When it comes to borrowing, income is everything. Lenders want to see income that is:

• Stable

• Ongoing

• Verifiable

This is the cornerstone of how borrowing power is assessed.

In Jasmine’s case:

• She was employed full-time as a nurse with consistent PAYG income 

• She also received regular child support payments, which some lenders include in servicing calculations if they meet specific criteria (such as a formal agreement and proof of regular receipt)

Even with a strong equity position, her capacity to borrow was determined by how much income she could demonstrate.

Pro tip: Even modest increases in income can make a significant difference. For example, boosting annual income from $110,000 to $120,000 could increase borrowing power by approximately $70,000, depending on lender policy and selected loan term.

2. Liabilities: Every Dollar Counts

Liabilities significantly reduce borrowing power. Lenders assess your capacity based on your available credit and obligations, even if you're not actively repaying certain debts.

These can include:

• Credit cards (even with a zero balance)

• HECS/HELP debts

• Car finance or novated leases

• Personal loans

• Buy Now Pay Later accounts

• Business loans (if they appear under your personal name or impact serviceability)

Jasmine was in a relatively strong position. She had no personal debts aside from the mortgage she was refinancing.

Pro tip: An unused $5,000 credit card limit can reduce your borrowing power by up to $21,000, depending on the lender. If you have multiple cards or unused facilities, closing them before applying could substantially improve your borrowing capacity.

3. Living Expenses: What You Spend Matters

Most borrowers underestimate how closely banks look at their living costs. Lenders either use actual declared expenses or apply a benchmark (based on household size and region), whichever is higher.

What lenders factor in:

• Private school tuition

• Childcare costs

• Health insurance

• Ongoing subscriptions and memberships

• Additional super contributions

• Utilities, transport, groceries

Jasmine paid $1,000/month in private school fees, significantly impacting her borrowing power by around $120,000, even though her income remained unchanged.

Pro tip:Living expenses reduce the income available for loan repayments. If you're preparing to borrow, consider how your essential vs. non-essential spending may affect your application and plan accordingly.

4. Equity: Helpful, But Not Everything

Many clients believe that having more equity automatically increases their borrowing limit. But here’s the reality: equity helps reduce lender risk but doesn’t contribute directly to your loan serviceability. In Jasmine’s case, her 50% equity was beneficial but not enough to secure her needed loan. Compared to someone with only a 10% deposit, her equity position added around $15,000 in extra borrowing power. Helpful, but not transformational.

Pro tip: Equity can help you:

• Avoid Lenders Mortgage Insurance (LMI)

• Access more favourable interest rates

• Be seen as a lower-risk borrower

However, it doesn’t replace income or allow you to stretch beyond what you can afford to repay.

5. Loan Type: Fixed, Variable, Offset—It Matters

Not all loan products are assessed equally. The structure of the loan itself affects how your borrowing power is calculated.

In Jasmine’s scenario:

• One lender offered her a maximum of $374,000

• Another lender offered $618,000

That difference is over $240,000 with the same income, equity, and property. The only differences were the lender and the product used. Different

Different loan types have different servicing buffers. Some fixed-rate products, for example, are assessed more conservatively than others.

Pro tip: The right product doesn’t just influence your rate or repayments, it can also significantly affect your borrowing limit. A knowledgeable broker will help match your short-term needs and long-term goals to the right loan structure.

6. Loan Term: Time = Affordability

The loan term, or how long it takes to repay the loan, also plays a big role. Longer terms mean lower monthly repayments and higher borrowing power.

Jasmine was willing to take on a 30-year term, which gave her greater flexibility. Some lenders offer 40-year terms, which can increase borrowing power further, but at a higher overall cost in interest.

Pro tip: Here’s a breakdown of total interest paid on a $500,000 loan at 6% interest:

• 20 years: $360,000

• 30 years: $580,000

• 40 years: $820,000

Borrowing more may help you now, but balancing affordability with the long-term cost is important.

Why Borrowing Power Varies So Much Between Banks

Each lender has its own methodology for risk assessment and serviceability. This is why clients often get dramatically different outcomes depending on who they approach.

Some lenders:

• Use higher servicing buffers on existing debts

• Count child support or bonus income differently

• Exclude secondary income (like overtime or side income)

• Allow exceptions based on the length of employment or the refinance purpose

This is where using a broker becomes so valuable. It’s not just about choosing a lender; it’s about choosing the right lender for your unique scenario and structuring the application to meet their internal guidelines.

Key Takeaways: How to Boost Your Borrowing Power

• Prioritise stable income, especially PAYG or long-term contracts

• Minimise liabilities wherever possible, including unused credit cards

• Review and reduce unnecessary living expenses

• Understand that equity helps, but doesn’t drive your loan size

• Select a loan product that aligns with your borrowing strategy

• Work with a broker who knows how to navigate policy and lender appetite

Need Help Understanding Your Borrowing Power?

If your bank has given you a lower loan amount than expected or rejected your application altogether, it doesn’t mean that’s the end of the story. We’ve helped clients increase their borrowing capacity by tens (and sometimes hundreds) of thousands simply by switching lenders, refining expenses, or choosing a better loan structure.

Book a quick, no-pressure chat with our team. We’ll help you understand what’s possible and how to structure your application for the best result.