Servicing and Income: How Lenders Decide What You Can Borrow

Servicing is a structured affordability calculation. In simple terms, a lender takes your assessable income, subtracts your living expenses, your existing financial commitments, and the repayments on the new loan, then checks that what is left over is positive with a healthy margin. If the sums work, the loan services. If they do not, the loan amount comes down until they do.

Two applicants on the same salary can end up with very different borrowing figures, because servicing is shaped by how each lender treats your particular income, your expenses, and your existing debts. That is the single biggest reason it pays to compare lenders rather than walk into one bank.

Lenders do not assess your new loan at the actual interest rate. Under rules set by APRA, the prudential regulator, every authorised lender must test your repayments at your product rate plus a serviceability buffer of 3 percentage points. So if your rate is around 6.5%, you are assessed as though you were paying roughly 9.5%. The buffer exists so that you are not stretched to the limit if rates rise, and it has been held at 3% since October 2021, most recently reaffirmed by APRA in 2025.

Many lenders also apply a minimum assessment, or floor rate, and use the higher of that floor or your buffered rate. With rates where they are today, the buffered rate is almost always the one that bites.

Not all income is counted at full value. Lenders apply a discount, known as shading, to income they consider less certain. The logic is that base salary from stable employment is more dependable than, say, a bonus that may not repeat. How aggressively each income type is shaded varies considerably from lender to lender, which is precisely where good advice earns its keep.

Because these policies differ so much, the same applicant can receive materially different borrowing figures from different lenders on identical income. If your income includes bonuses, commission, casual hours or self-employment, the right lender match is often the whole game. This is a core part of how we help first home buyers and anyone whose income does not fit the standard salaried mould.

Lenders subtract your living expenses from your income before working out what is available for repayments. You declare your actual expenses, but lenders also apply a benchmark called the Household Expenditure Measure (HEM), which estimates a reasonable minimum spend based on your income, location and household size.

The lender uses the higher of your declared figure or the HEM, so understating your spending rarely helps. Tidying up genuine discretionary spending in the months before you apply, on the other hand, can lift your assessed surplus and therefore your borrowing capacity.

Your current debts reduce your borrowing capacity, sometimes by more than people expect. Personal loans and car finance are counted at their repayment. Credit cards are assessed on the limit, not the balance, so a barely used card with a high limit still eats into your capacity. HECS or HELP debt is treated as an ongoing commitment while it remains.

This is also why debt consolidation can do more than simplify your repayments: rolling higher-rate debts into your home loan can free up serviceability as well as cash flow, provided you keep the repayments up afterwards.

Servicing looks at the flow of money in and out. Debt-to-income ratio (DTI) looks at the size of your total debt relative to your income. It is calculated by dividing your total borrowings by your gross annual income. Borrow $600,000 on a household income of $120,000, and your DTI is 5. Most owner-occupiers sit comfortably around 4 to 5; investors using rental income to support new loans tend to run higher.

APRA has long regarded a DTI of 6 or above as high-risk lending. From 1 February 2026, that view became a hard limit. Authorised lenders may now write no more than 20% of their new mortgages at a DTI of 6 or higher, measured separately for owner-occupier and investor lending, and assessed each quarter.

The practical upshot is that lender selection now matters more than ever for higher-DTI borrowers. Two applicants with identical finances can get very different answers depending on each lender's remaining capacity and risk appetite. Investors in particular should expect closer scrutiny, since investor lending is where high-DTI borrowing has been growing fastest. If you are building a portfolio, this is worth planning around early, and it is central to how we structure investment finance.

Servicing and DTI are two different tests, and your loan has to pass both. Servicing asks whether you can afford the repayments at the buffered rate after expenses and commitments. DTI asks whether the total debt is sensible against your income and whether the lender has room to write it. A loan can clear servicing comfortably yet bump against a lender's DTI limit, or sail through on DTI but fall short on servicing because of shaded income or a high credit card limit.

This is the part that genuinely rewards expertise. Knowing which lender shades your particular income the least, which has DTI headroom, which floor rate applies, and how your living expenses will be benchmarked is detailed, current, lender-by-lender knowledge. At Lender Edge we compare more than 35 lenders, we charge you no broker fee, and under the best interests duty we are legally bound to act in your favour, not the lender's. Whether you are buying your first home, refinancing, or exploring HomeStart Finance, we match your income and circumstances to the lender most likely to say yes, on the sharpest terms available.