14 May 2026

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Why Your Borrowing Capacity Has Dropped (And What Actually Moves It)

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A client walked into our office last week with a pre-approval number from January. By May, the same lender was offering her around $48,000 less on the same income. Nothing about her situation had changed. The numbers around her had.

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If you've applied for a home loan recently, or you're about to, borrowing capacity is probably the figure you're most focused on. It's also one of the least understood. Most people assume it's a function of their income and the property price. It's neither.

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At Claremont Financial we run borrowing capacity calculations across multiple lenders every day, and the same applicant can come back with results that differ by $100,000 or more depending on who's looking at the file. Here's what's actually moving the dial in 2026, and what you can do about it.

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What Borrowing Capacity Actually Is

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Borrowing capacity is the maximum loan a lender will give you based on a serviceability formula. The basic shape of that formula is the same at every lender in Australia:

Net income, minus living expenses, minus existing debt commitments, minus the assessed repayment on the new loan, has to leave a positive surplus.

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What changes between lenders is how each of those inputs gets calculated. That's where the gaps open up.

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The APRA Buffer Is the Biggest Lever

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The single biggest factor compressing borrowing capacity right now is the APRA serviceability buffer. Australian banks (and any other APRA-regulated lender) must assess your ability to repay at three percentage points above the actual rate you'd be paying.

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So with variable rates sitting around 6.25% to 7% after the May 5 hike to 4.35%, the bank runs the numbers as if you'd be paying somewhere between 9.25% and 10%. That's not the rate on your loan. It's the stress test the bank applies to decide how much you can borrow in the first place.

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The impact is significant. On a typical $120,000 income, the 3% buffer reduces borrowing capacity by roughly $80,000 to $120,000 compared to being assessed at the actual rate. The 25 basis point hike on May 5 didn't just push repayments up, it also pushed the assessment rate higher, which is exactly why the numbers people got in January don't match what they're seeing in May.

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Non-bank lenders (Liberty, Pepper, Resimac, Firstmac, La Trobe and others) aren't bound by APRA's 3% rule. They typically use a 1 to 2 percentage point buffer instead. For borrowers who are tight on serviceability, that one detail can mean the difference between approval and decline. We see it constantly with self-employed clients and investors carrying more than one property.

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HEM: The Living Expense Floor You Can't Argue Down

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The Household Expenditure Measure (HEM) is a benchmark Australian lenders use as the floor for your assumed living expenses. If you declare you spend $2,500 a month and HEM for your household says $3,200, the lender uses $3,200. Declaring expenses below HEM doesn't help. The lender overrides your figure.

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HEM varies by household type (single, couple, with or without children) and by income band. Higher-income households get a higher HEM applied. It also moves with inflation, so the figure you're assessed against in May 2026 is materially higher than it was in 2022.

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Two practical implications:

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A single high earner who actually lives modestly can be penalised by HEM. The benchmark assumes spending based on your income band, not your real frugality.

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Every dependent child increases your HEM. Each child reduces borrowing power by roughly $30,000 to $50,000 depending on the lender and the child's age.

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The Things People Forget Are Killing Their Borrowing Power

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Credit card limits are the biggest one. Lenders assume you could max out your card tomorrow, so they assess your serviceability against the full limit, not your balance. The standard treatment is around 3% to 3.8% of the total credit limit per month as an assumed repayment.

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A $20,000 credit card limit you never actually use costs you roughly $600 to $760 per month in assumed commitments. That alone can reduce your borrowing capacity by $80,000 to $100,000.

Other commitments that quietly eat into capacity:

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HECS-HELP debt. Your compulsory annual repayment is treated as a monthly liability. There was a positive change in July 2025 that altered how HECS is calculated. Repayments now apply only to the income above the threshold rather than the full income, which freed up serviceability for a lot of graduates. From September 2025, banks were also given guidance allowing them to exclude HECS from serviceability calculations entirely when a borrower is within 12 months of paying it off. Worth knowing if you're close to clearing your debt.

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Personal loans and car loans. Actual monthly repayments are included in the calculation. Clearing a $300 a month loan can lift borrowing capacity by $50,000 to $80,000.

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Buy now, pay later commitments. Most major lenders now factor BNPL limits into their assessment.

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Why the Same Borrower Gets Different Numbers From Different Lenders

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This is the part that catches people off guard. The serviceability framework is the same across all lenders. The inputs are not.

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Income shading is one of the bigger differences. Some lenders count 100% of regular overtime, others count 80%, some only 60%. Bonus income, commissions, RSU income, casual earnings, contract work, all get shaded differently from lender to lender.

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Rental income shading is the same story for investors. Some lenders count 80% of gross rent, some 70%, a few accept 90% in narrow cases. For a portfolio investor, a 10% shading difference can reshape the entire serviceability picture.

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How existing debts are treated also varies. Some lenders use your actual home loan repayment when assessing an investment loan application. Some apply a stress rate. Some use a floor rate that's higher again.

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This is why we routinely see the same applicant assessed for $200,000 more at one lender than another. The borrower hasn't changed. The lender's policy has.

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A Quick Note for Investors After the May Budget

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If you're an investor reading this, the May 13 federal budget has changed the longer-term landscape, but it hasn't changed how borrowing capacity itself is calculated. The serviceability formula is the same. The APRA buffer is the same. The HEM treatment is the same.

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What has changed is the after-tax economics of new investment purchases of established property from 1 July 2027 onwards, and the CGT position when you eventually sell. Grandfathering protects properties you already hold (or had under contract) as at 7:30pm 12 May 2026.

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In practical lending terms, this means a few things. The rental income shading rules still apply, so lender selection is still a huge driver of how far your investor borrowing capacity stretches. If you're considering a new build (which retains negative gearing access under the new rules), the lender's policy on construction lending and end-loan valuation becomes part of the conversation. And if you're restructuring or refinancing existing investment debt, the grandfathering position needs to be considered alongside the lending structure. That's a conversation to have with both your accountant and your broker before you make any moves.

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What You Can Actually Do About It

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If your borrowing capacity is falling short of where you need it to be, here are the levers that genuinely move the number:

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Cancel unused credit cards or reduce your limits. This is the quickest win for most borrowers.

Clear small consumer debts before applying. Personal loans, car finance, BNPL accounts, anything with a monthly commitment.

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Choose your lender deliberately. If you're a PAYG borrower with a clean profile and no urgency, you have a lot of options. If you're self-employed, have variable income, or are stretching for an investment property, lender selection becomes critical.

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Get the loan term right. A 30-year term has lower assessed monthly repayments than a 25-year term, which lifts capacity. Over the life of the loan you'd pay more interest, but if capacity is the bottleneck, this matters.

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Restructure existing loans. Sometimes refinancing an existing mortgage before applying for a new one (to lower assessed repayments, or to consolidate consumer debt) opens up the serviceability headroom you need.

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Where We Come In

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Working out your real borrowing capacity isn't a one-calculator job. The number that matters is the maximum capacity you can access across the lenders you actually qualify for, given your income type, your debt structure, and the property you're trying to buy.

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That's what we do. We run your scenario across the lenders we have access to, identify which ones treat your income type favourably, and work out the structure that gets you the most usable capacity without compromising the loan itself.

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If your borrowing capacity has dropped, if a bank has come back with a number that doesn't match what you need, or if you just want to know what's actually possible before you start house hunting, get in touch. We'll run the numbers properly.

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Have a chat with the team at Claremont Financial.

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