A worked example
Sophie, a registered nurse in Melbourne, earns $85,000 per year. Her partner Tom works in retail on $62,000. They want to buy their first home and need to know how much they can borrow.
Their combined gross income is $147,000 annually, or $11,270 per month after tax (using ATO rates for 2025-26, accounting for Medicare levy). They have monthly expenses of $3,200 (rent, groceries, bills, transport), a $6,000 credit card limit (even though they pay it off each month), and Tom has a $28,000 HELP debt from his hospitality degree.
Most lenders assess their application like this: Net monthly income of $11,270, minus living expenses of $3,200, minus the credit card buffer (banks assume 3% of the limit, so $180), minus Tom's HELP repayment (around $234 monthly based on his income). That leaves roughly $7,656 per month.
At current assessment rates (around 8.5% including buffers), they could service a loan of approximately $650,000. The HELP debt doesn't reduce the loan amount directly, but the monthly repayment does. The unused credit card limit costs them about $60,000 in borrowing power, which is why their broker suggested cancelling it before applying.
State-by-state differences
- NSW: Stamp duty is the highest in Australia for most property prices, but doesn't affect borrowing power calculations directly. First home buyers under the First Home Buyer Choice scheme can opt for an annual property tax instead, which may improve serviceability if banks assess it as lower than equivalent rent.
- VIC: Similar borrowing power assessments to NSW. The state's higher land tax thresholds (principal place of residence is exempt) mean this rarely affects first home buyers, but investors borrowing for Victorian properties face land tax on top of loan repayments.
- QLD: Borrowing power calculations are identical, but regional Queensland buyers often find their income is lower while property prices in Brisbane have risen significantly. Banks use the same HEM benchmarks regardless of whether you're in Cairns or the Gold Coast.
- WA: FIFO workers with variable rosters need to show consistent income over 12-24 months. Many lenders discount overtime and allowances by 20-50%, reducing borrowing power despite high headline income.
- SA, TAS, NT, ACT: No state-specific variations in how borrowing power is calculated, though Canberra's high proportion of public servants means more applicants with stable, well-documented income, and Darwin's smaller lending market sometimes means fewer lender options.
Common mistakes people make
- Keeping unused credit cards and buy-now-pay-later accounts active. Banks assess your maximum possible debt, not what you actually owe. A $10,000 credit card limit you never use can reduce your borrowing power by $150,000 or more. Cancel cards you don't need at least three months before applying for a home loan, and get written confirmation from the bank that the account is closed.
- Declaring net income instead of gross. Lenders need your pre-tax salary to calculate borrowing power accurately. If you earn $90,000 but only think about your take-home $70,000, you'll underestimate what you can borrow. Always use your gross income figure from your payment summary or employment contract.
- Forgetting to include rental income or regular overtime. If you've worked consistent overtime for 12+ months, most lenders will count 80-100% of it. Investment property rental income (minus expenses and a vacancy buffer) also counts. Many borrowers leave this out and borrow less than they could.
- Assuming all lenders assess the same way. One bank might add 20% to your declared living expenses, another might use the HEM benchmark regardless of what you actually spend. Your borrowing power can vary by $100,000+ between lenders, so don't just ask your current bank.
What this calculator doesn't account for
This calculator uses simplified assumptions and won't account for several real-world factors. It doesn't include one-off bonuses, commissions, or irregular income unless you specify average figures. Salary packaging arrangements (common for nurses, teachers, and charity workers) aren't factored in, though they can improve serviceability. If you have complex income structures like family trusts, partnership distributions, or ABN income under two years old, you'll need manual assessment.
The calculator assumes you're an Australian permanent resident or citizen. Temporary visa holders face different lending criteria and often lower LVRs. It also can't predict policy changes. Lenders adjust their assessment rates and buffers regularly, sometimes monthly, so your borrowing power today might differ from next quarter.
Child support payments, gambling transactions on bank statements, and recent credit enquiries all affect real-world lending decisions but aren't captured here. This tool gives you a starting estimate, not a pre-approval.
Edge cases and nuances
- Self-employed applicants with good tax planning: If you're a sole trader or company director minimising tax through legitimate deductions, your tax return might show $60,000 income while you actually draw $100,000. Most lenders average your last two years of tax returns and add back some depreciation, but you'll still borrow less than a PAYG employee on the same cash income. Some lenders offer 'low doc' loans using accountant declarations, but expect to pay 0.5-1% higher interest.
- Income above $180,000 (Division 293 tax threshold): High income earners face additional superannuation tax, but this doesn't directly affect borrowing power calculations. However, if you're salary sacrificing heavily to minimise Division 293 impact, lenders use your reduced taxable income, not your package value. Make sure your employment contract clearly states your gross package.
- Parental leave and planned career breaks: If you're currently on paid parental leave (18 weeks at national minimum wage, or employer-funded schemes), lenders won't count Centrelink parental leave pay as ongoing income. You'll need a return-to-work letter from your employer stating your pre-leave salary and confirmed return date, and some lenders still won't assess your application until you're back at work.
- Separated applicants with informal child support: If you pay child support privately without a Child Support Agency assessment, lenders might not accept it as a committed expense, which actually hurts you. Formalising the arrangement through Services Australia creates a paper trail that lenders accept, and might reduce your assessed expense compared to what banks assume for undeclared dependants.
