How Australian banks calculate your serviceability

Serviceability is the lender's assessment of whether you can afford the repayments on the loan you've asked for - plus whatever buffer APRA requires. It's calculated line-by-line, and understanding the lines lets you legally maximise your borrowing capacity.

The basic formula

Monthly net income − living expenses − existing debt commitments − buffer = surplus available for the new loan repayment

Divide the surplus by the stressed loan repayment (at rate + 3%) and you get the maximum loan size. A surplus of $2,000/month at a stressed rate of 9% supports about $250,000 of loan.

Income

Each dollar of income is weighted:

• PAYG base salary, year-to-date annualised: 100%
• Overtime, bonuses, commissions: typically 80%, sometimes 60% (industry-specific)
• Rental income from other properties: typically 75% (the 25% shade covers vacancy and maintenance)
• Share dividends, trust distributions: 60-80%, or sometimes excluded
• Child support, family tax benefit: 100% but only if ongoing and documented

Two years of consistent commission income is usually enough to shift a lender from 60% to 80% weighting.

Living expenses

Most lenders use the Household Expenditure Measure (HEM) or your declared expenses - whichever is higher. HEM varies by household composition, location and income band.

A Sydney family of four earning $180,000 has a HEM of roughly $5,800/month. Declare less and the lender uses HEM anyway.

Existing debt commitments

This is where many borrowers lose capacity without realising:

• Credit card limits (not balances) are treated as a 3.8% monthly repayment. A $30,000 credit card limit costs you ~$1,140/month of servicing, even if the balance is zero.
• Personal loans and car loans count at actual repayment, grossed up.
• HECS/HELP debt counts at the ATO's repayment rate for your income band.
• Existing home loans count at current repayment, plus the APRA 3% buffer on variable loans.

Cancelling unused credit cards before you apply can add $50,000-$150,000 to your capacity.

The APRA 3% buffer

The new loan's repayment is calculated at the rate you'd pay plus 3%. If you apply at 6.10%, servicing is stress-tested at 9.10%. That's why a 25 bp RBA cut doesn't increase your borrowing power by much - the buffer compresses the effect.

The lender variance

Not all lenders calculate serviceability identically. The three main differences:

1. HEM vs declared expenses. Some lenders are HEM-heavy; others will accept realistic declared expenses if you document them.
2. Rental shading. Big four shade rent at 75-80%; some second-tier lenders shade at 75% for standalone houses but only 65% for high-rise units.
3. Debt-to-income (DTI) caps. APRA watches aggregate DTI. Most lenders cap new loans at 6x gross income; some go to 7x or 8x for high earners.

A clean file at bank A might borrow $750,000; the same file at bank B might borrow $850,000. The difference is servicing policy, not income.