How Banks Calculate Your Borrowing Power in 2026: APRA Buffers Explained

Written by Amara Chen, Finance Contributor · Reviewed by Daniel Whitfield

When preparing to purchase property in Sydney or anywhere in Australia, your journey begins in the credit risk algorithms of Australian lending institutions. Within our core Finance & Lending Basics knowledge hub, understanding how banks determine your borrowing capacity is critical to setting a realistic acquisition budget.

Many prospective purchasers mistakenly believe that if they can afford monthly repayments at current variable rates (e.g., 6.2%), the bank will approve their loan. In reality, regulatory mandates established by the Australian Prudential Regulation Authority (APRA) require lenders to evaluate your finances through rigorous stress-test serviceability buffers.

Managing your loan-to-value ratio alongside your borrowing power is equally crucial to avoid costly insurance premiums, as explained in our guide on LVR and LMI reduction strategies.

1. The APRA 3.0% Serviceability Buffer

Under APRA prudential standards (APS 220), all authorized deposit-taking institutions (ADIs) must assess prospective borrowers at the contractual interest rate plus a minimum buffer of 3.00% (or a floor rate, whichever is higher).

For example, if your actual home loan rate is 6.15%, your bank will test whether your net income can comfortably service repayments at 9.15%. This regulatory requirement reduces the borrowing power of an average Australian household by approximately 25% to 30%.

2. How Lenders Assess Your Income

• Base Salary (PAYG Permanent): 100% of gross base income is typically accepted.
• Overtime, Bonuses & Commissions: Most lenders shade discretionary income, recognizing 60% to 80% of historical averages.
• Rental Income: Lenders apply a 20% to 30% discount to buffer against maintenance and future yield fluctuations.

3. Living Expenses and the HEM Benchmark

Lenders calculate your monthly commitments using the higher of your declared living expenses or the Household Expenditure Measure (HEM) table. In addition, every $10,000 credit card limit reduces borrowing power by roughly $40,000 to $50,000 because banks assess it as fully drawn credit at 3% monthly repayment.

To ensure you secure the most competitive loan structure across over 30 Australian lenders, evaluate whether to use a mortgage broker vs going directly to a bank.