18 May 2021

How Does a Lender Assess My Borrowing Capacity?

When you apply for a mortgage, the lender will use a standard equation to determine your borrowing capacity. This number will allow them to determine the loan amount you can pay back. The bank uses your gross income, tax, existing commitments, new commitments and living expenses to determine your monthly surplus. 

Gross income

To calculate your gross income, banks will consider your base income, Family Tax benefits and rental income from properties you own. Some banks may utilise overtime, bonuses and commission as part of their equation if these are regular income.


Each lender has its own way of calculating tax expenses. Mortgage brokers can help you determine which lenders they have relationships with will calculate your tax expenses favourably.

Existing Commitments

Lenders will analyse your current mortgages and other loans along with 2-3% of your credit limit to determine your existing commitments.

New Commitments

To calculate your new commitments, banks will use a rate 2-3% higher than your actual mortgage interest rate. This higher calculation will provide you with a safety net in case of increased interest rates.

Living expenses

Banks will calculate two forms of living expense: your estimated cost of living or the average minimum cost of living for your family size or HEM (Household Expenditure Measure). The higher of these two figures is what banks use in their equation. The first adult and child are calculated at a higher expense than subsequent adults and children, ensuring that you can still pay your mortgage while supporting your family.

Using the values above, lenders will calculate your borrowing power. Mortgage House and its expert team of brokers know how each lender calculates borrowing capacity and what other factors they may consider when reviewing loan applications. They can help you choose the lenders that will approve you for a favourable loan.

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