How borrowing power is determined and why interest rates and credit cards matter more than you think

By Christian Stevens Flint Mortgage Brokers

When clients first come to me to discuss buying a home, one of the first questions they ask is, "How much can I borrow?" It seems like a simple enough question, but the answer is far more nuanced. Borrowing power is influenced by a range of factors, not just income and savings, and small financial details can have a surprisingly big impact.

Understanding how lenders calculate borrowing capacity is essential to shaping your overall property strategy. It determines what kind of property you can afford, where you can look, and in some cases, whether you can buy at all.

What lenders are really looking at

Borrowing power is based on your ability to repay a loan, not your desire to own property. Lenders will assess your gross income, which includes salary, bonuses, and any rental income. They also consider your regular living expenses, any existing debts such as car loans or HECS-HELP, and the number of dependents you support. Your credit history plays a role, along with current and anticipated interest rates.

To ensure you can manage repayments under changing conditions, lenders apply what's called a serviceability assessment. This means they add a buffer - usually around 3 per cent - to the actual interest rate. If your loan rate is 6 per cent, the bank may assess your ability to repay at 9 per cent. This stress test helps the lender guard against rate rises and income shocks, but it also reduces the amount you may be approved to borrow.

This is why two people with the same income might receive vastly different borrowing limits depending on their other financial commitments and the lender's assessment model.

Interest rates have a powerful effect

Interest rates are one of the biggest levers in determining borrowing power. As rates rise, the projected repayments on any loan increase. Because lenders want to see that you can comfortably manage repayments with a buffer, higher rates effectively reduce your borrowing capacity.

To put this in perspective, someone earning $120,000 per year may have been able to borrow over $800,000 when rates were at record lows. With today's higher rates and tighter buffers, that same borrower might only qualify for around $650,000.

This is why watching rate movements is crucial even before you apply for finance. Your borrowing power is not fixed - it shifts as rates and lending policies change.

Why credit card limits reduce your capacity - even if you never use them

One of the most overlooked factors in borrowing assessments is your credit card limit. Many borrowers assume that if they pay their balance off in full each month, it will not impact their loan application. Unfortunately, that is not how lenders view it.

Lenders typically assess credit cards based on the limit, not the balance. A common rule is to treat 3 per cent of the total credit card limit as a monthly repayment. That means a $20,000 card - even with a zero balance - could be considered a $600 monthly expense.

This small detail can reduce your borrowing capacity by tens of thousands of dollars. Reducing or cancelling unused cards before applying for a loan can make a real difference to your approval prospects.

Other factors that can shift your borrowing power

Each lender has its own credit policy, which means your outcome can vary significantly depending on where you apply. A borrower who is self-employed may be assessed very differently to a salaried worker, even with the same income. Lenders also differ in how they treat overtime, bonuses, or recent job changes.

Other factors include the number of dependents you support and the loan term you choose. A 30-year loan term typically offers higher borrowing power than a 25-year one because the repayments are lower.

This is where working with a broker becomes crucial. We regularly see clients declined by one lender and approved by another using the same documentation. Understanding the policy differences between banks is one of the key advantages a broker brings to the table.

Know where you stand before you start the search

Before attending open homes or bidding at auctions, it is essential to understand your borrowing power under current conditions. This is not just about avoiding disappointment - it is about setting a confident and realistic budget and knowing how to improve your position.

A small tweak, such as reducing your credit card limits, adjusting your preferred loan term, or changing lenders, could unlock tens of thousands of dollars in borrowing power. That could be the difference between buying the right home now or needing to wait and revisit your plans later.

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Christian Stevensis the founder of Flint - Australia's Leading mortgage Brokers. He is a five-time recipient of the Best Residential Broker in Australia and has been named Australian Broker of the Year three times. In 2024, Flint was recognised as the Leading Finance Brokerage in the country. Christian has helped thousands of Australians build wealth through property. His views are his own and do not constitute financial advice.