Borrowing capacity is the loan amount a lender will actually approve for a client, calculated by testing income against expenses, existing debt and a stressed interest rate. Brokers calculate it by working through the lender’s own method: verify income, apply policy haircuts, load every liability at its assessment rate, then run serviceability with the assessment buffer applied.
Every lender reaches a different answer because each applies different buffers, shading rules and add-backs. The broker’s job is to know those differences well enough to match the client to the lender whose calculation treats their situation fairly.
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Work through the calculation in order
- Verify income with payslips, tax returns or notices of assessment, then shade it to policy: casual and overtime earnings are usually discounted, and probationary income often excluded.
- List every liability at its assessment value: credit card limits even when paid in full, HECS-HELP balances above policy thresholds, personal loans, existing mortgages and any proposed facility.
- Apply the household expense estimate required by the lender’s benchmark, adjusted upward where the client’s declared lifestyle spending is higher.
- Run serviceability using the lender’s buffered rate rather than the headline product rate.
- Compare the surplus against the lender’s minimum, then check the result against the deposit available so the price range is realistic on both counts.
Check security before you quote a number
Capacity means nothing without usable security. Estimate the LVR early, because crossing a threshold changes pricing and adds lenders mortgage insurance, which itself consumes borrowing capacity. Review the client’s credit history at triage too, since adverse listings can rule out mainstream lenders regardless of what the calculator says.
The common mistake is quoting an indicative figure from one lender’s public calculator and treating it as universal. Calculators differ wildly, and the client who budgets to a generous online number then faces a disappointed conversation when the actual assessment lands lower.
Match the client to the right policy
Each lender publishes its own lending criteria, and the differences decide marginal files: one may accept overtime at full value after two years, another shades it entirely; one ignores HECS-HELP below a balance threshold, another loads every cent. Weak credit scores narrow the panel further. This matching work is precisely what a broker adds over a bank’s single-lens view.
Rate expectations belong in the same conversation. Movements in Variable-rate mortgages, decisions by the Reserve Bank on the cash rate and the gap between fixed and variable pricing all flow into how far a given income stretches, so present capacity as a current snapshot that changes when settings change.
Improve capacity before lodging where you can
Sensible levers exist: reducing card limits, consolidating short-term debt, extending the loan term or restructuring repayments from interest-only to principal and interest where assessment treatment improves. Some levers suit some clients only, so test each against the file rather than applying them by habit.
Mortgage brokers who manage this well run the numbers through two or three likely lenders before any conversation about price, keep worksheets showing how each figure was derived, and hand clients a realistic budget instead of a best case. When the chosen file proceeds, the same worksheet supports the application process end to end, and clean supporting documents stop mortgage applications stalling at verification.
If your capacity assessments currently live in memory rather than method, fix that this week: build one standard worksheet listing income shading, debt-to-income ratios, liability loading and buffer assumptions per lender, and use it for the next five files. Comparing your final approved amounts against the worksheet’s predictions will show exactly which assumptions need calibrating.
