How Banks Decide What You Can Borrow As A First Home Buyer
Borrowing capacity isn't just about your income and it's not the same at every bank.
When you apply for a home loan, banks are also looking at your deposit, your debts, your spending, your credit history, and even the property you're buying to decide how much they're willing to lend you and how risky your loan looks to them.
Understanding how this works helps you plan better, avoid delays, and get matched to the right lender from the start.
So in this resource, we're walking through:
What banks actually look at when they assess you
Why your borrowing capacity isn't the same at every bank
The difference between what a bank will lend you and what's right for you
How choosing the right lender can make a big difference to your options
This resource supports Episode 34 of the First Home Unlocked Podcast: How Banks Decide What You Can Borrow as a First Home Buyer.
What Banks Are Actually Looking At
When a bank assesses your loan, they're not just asking, "Can you afford a mortgage?" They're also asking, "How risky is this loan for us?"
They answer that by looking at a few key areas together.
Income: The Biggest Driver of Your Borrowing Capacity
Income is the biggest driver of borrowing capacity but it's not just about how much you earn, banks also care about how stable and reliable that income is. So this means two people earning the same amount can get very different outcomes depending on:
How long they've been in the role
Whether it's base salary, overtime, bonuses, or self-employed income
How consistent that income's been over time
How Banks Verify Your Income
Banks also need to verify your income, and what they ask for depends on how you earn it and which lender you're working with.
For most PAYG employees, that usually means providing:
Your last two payslips
Sometimes an employment contract if the role is new or you're on probation
If your income includes overtime or bonuses, banks often want to see a longer history before they'll count it and it's common for lenders to shade that income, which means they might only factor in 80% of it to allow for future variation, even if you've been earning it consistently.
For casual, contract, or self-employed buyers, the rules can be stricter, banks are generally looking for consistency over time and the way they assess that can vary a lot between lenders.
Why Timing Matters
This is also where timing matters for example, if you've recently:
Changed roles
Switched industries
Moved from PAYG to self-employed
That can temporarily reduce how much a bank is willing to lend, even if your income is strong on paper. But different banks have different policies, so it's still worth speaking with us to see what your options are and start making a plan.
Deposit: What Banks Look For and Why It Matters
The next thing banks look at is your deposit and while your deposit size doesn't directly change how much a bank will lend you in the same way income does, it does affect how the bank sees the risk of your loan, and in some cases, whether they'll lend to you at all.
If you're using pathways like the 5% deposit scheme or LMI waivers, the source of your savings and how long you've held your deposit can matter to the lender as well.
Genuine Savings Explained
This is where genuine savings comes in and genuine savings usually means money you've saved yourself and held for around three months, showing the bank that you can save consistently. That three-month timeframe is pretty standard across the industry and it's important if you're using the First Home 5% Deposit Scheme, where that 5% has to be genuine savings.
Like I just mentioned genuine savings usually means money you've saved yourself in a bank account but most lenders will also count your rental payments as genuine savings if you've been renting consistently and some lenders will accept First Home Super Saver contributions too, depending on their individual policies.
When You Don't Need Genuine Savings
Not all buyers need genuine savings in every situation, for example, if you're buying with an LVR under 80% or using a family guarantor loan, you don't have to meet the genuine savings rules.
Come and Speak to Us Early
It's about coming and speaking to us early, there are different ways that we can show genuine savings, and you don't want to be holding back on buying your first home because you think you have to hold your savings, for example, for another couple of months in your bank account when you could have been using your rental payments as that genuine savings to tick the box.
If you're in that situation where you're not sure if you've met genuine savings requirements, book in a chat, we can look at your situation and see if you have ticked that box and if you are ready to take action to buy your first home.
One Simple Tip
If you're building your deposit, use a separate savings account, it makes it easy to prove to the bank that you've been saving consistently and held the funds for three months. Otherwise, if you're mixing it in with everyday spending or moving money around, lenders might need extra bank statements to follow the trail and it just slows things down.
Liabilities: How Your Debts Reduce Borrowing Capacity
Next up, let's talk through liabilities and when banks look at liabilities, they're looking at things like personal loans, car loans, HECS or HELP debt, credit cards, and Buy Now Pay Later accounts. It is important to understand any of these debts are going to reduce your borrowing capacity.
Credit Cards
When banks assess credit cards they look at the limit not what you owe right now and borrowing capacity is generally reduced by 5 times your credit card limit. So even if you pay your card off every month, a $10,000 limit can reduce your borrowing capacity by around $50,000.
Why they take the limit is because that's credit you've already been approved to use so you could go out and spend up to that limit tomorrow, so they factor in the worst-case scenario.
Important Note About Closing Credit Cards
It's always interesting, as a first home buyer to see how much borrowing capacity you gain when you do things like close your credit card.
But when you're organising your pre-approval, you don't have to close your credit card right then, we can tell your lender that it will be closed when you purchase and you will just need to close the credit card and provide a closure letter before the bank will give you the final formal approval after you purchase.
Buy Now Pay Later
Another debt that's becoming more common is Buy Now Pay Later services like Afterpay and Zip and BNPL. They didn't use to impact your credit file but after some updated legislation they now do.
With these debts banks treat them the same way they treat credit cards. So even if your limits are small and you're paying everything off on time, the bank still factors in your maximum approved limit because you could max it out tomorrow. If you've got multiple BNPL accounts, it can reduce your borrowing capacity and raise questions with the lender due to the multiple open credit inquiries.
Even though the balance can be small It's really important to be making those repayments on time, no matter how big the debt is because when you're not making repayments, that really does raise concerns with the lenders when you go for a formal application or an application to get pre-approved for your first home.
HECS/HELP
HECS or HELP debt is one that comes up a lot with first home buyers and the way HECS actually impacts borrowing capacity comes down to the way it reduces your income. Because HECS repayments are withheld from your take-home pay, the banks reduce how much of your income they can assess, therefore reducing how much you can borrow.
This means two people with the same salary pay the same amount of HECS, even if one owes $30,000 and the other owes $100,000. Lenders care more about how much your HECS repayments reduce your take-home pay than the total size of the debt itself.
How HECS Policies Are Changing
This is an area that's changing quickly with the banks and over the last year, most of the major banks have updated their policies around HECS debt, and we're seeing three main approaches:
Some banks will now exclude your HECS repayments from their calculations if the debt will be fully paid off within the next 12 months
Others have set a threshold where they'll exclude HECS debts under a certain amount, like $20,000
Some banks have removed HECS from their servicing calculations altogether
So the landscape is definitely shifting as banks respond to affordability pressures.
Should You Pay Off Your HECS?
We often get asked if it's worth paying off your HECS to boost borrowing capacity and it really depends on your situation. Often that cash is better kept as a buffer in your offset account, saved for emergencies, or used to increase your deposit but sometimes strategically paying down part or all of your HECS can unlock more borrowing power.
For example, say you've got a $25,000 HECS balance, if you use $5,000 to bring it under $20,000 you could access one of those bank policies we mentioned earlier and that might unlock enough extra borrowing capacity to help you access a better quality property or a location you couldn't reach otherwise.
This is where reaching out to us early makes a difference, we can run the numbers with you, compare what different lenders will offer, and help you figure out whether paying down your HECS makes sense before you actually do anything.
It's a case-by-case basis, you've got to be really careful because you can't then go borrow it back if you change your mind. You need to be careful because it's not something you can undo once you've paid off your HECS or paid part of your HECS debt off.
So that's where we come back to: come and speak to us, let's run the numbers first and see what impact it does have and if it is worth using some of your deposit to pay down your HECS strategically, we can work out what that looks like for your situation.
Expenses and Living Costs: How Banks Assess What You Can Afford
The banks are also looking at your living expenses to make sure you can actually afford the repayments. Banks don't just take your word for what you spend each month, they use benchmark figures called Household Expenditure Measure (or HEM expenses), which are based on your household size (how many dependents you have) and your income.
How HEM Works
If your declared expenses are lower than the HEM benchmark, the bank will usually ignore your estimates and use the higher number anyway but if your actual expenses are higher than HEM, the bank will use your higher number which can reduce your borrowing capacity.
Common expenses that push people above the HEM benchmarks include things like private school fees and private health insurance and lenders also usually factor in a 3% assessment buffer, to stress-test whether you could still afford the loan if rates increased.
Why Understanding Your Own Expenses Matters
It’s still really important to understand your own expenses not just rely on what the bank assumes through HEM, because knowing what you actually spend and can comfortably afford in repayments is what helps you choose a property that fits your real-life budget not just what the bank will approve you for.
How the Banks Look at Statements
Let's now talk about what banks are actually looking at on your bank statements when assessing your borrowing capacity and in most applications lenders will only require bank statements for your savings accounts. This goes back to that genuine savings requirement and proof of deposit we mentioned earlier.
When They Might Need More
There are situations where they might need more, for example if you had your genuine savings in a separate account or across multiple accounts and they need to prove the trail or if you're relying on rental payments as genuine savings, the lender will usually want to see a rental agreement and sometimes bank statements showing those transfers.
Also if the lender is looking through your bank statements, they may ask questions about things like regular spending on gambling, adult entertainment, or large cash movements.
One Simple Strategy
With the bank reviewing your application, they can only see the statements you provide to them so one simple strategy is to keep your day-to-day spending at a separate bank from where your savings sit.
That way, when the bank reviews your statements they're seeing clean savings patterns, consistent transfers, and your rental payments, not every coffee or weekend purchase. It keeps things clean, makes the application process smoother, and means the bank isn't asking unnecessary questions.
Credit History and Behaviour: What Banks Are Looking For
Banks will also look at your credit history and run a credit report on all applicants when you apply for a loan. Credit in Australia doesn't work the way most people think it does and banks aren't rewarding you for having lots of credit, they're mostly looking for signs of risk.
They're paying close attention to things like missed or late payments, defaults on things like phones, utilities, or personal loans, and lots of recent credit applications in a short period of time.
This doesn't directly impact how much the bank will lend you but if there are red flags in your credit history the bank may not lend to you at all for a time period and depending on the issue you might need to wait six months or more to rebuild a clear credit history before applying again.
Examples That Could Impact Your Application
One missed repayment because an auto-transfer didn't go through can usually be explained and worked through with lenders but if you have multiple missed repayments in a row that can delay a home loan application for six months or more while you rebuild your credit file.
A Common Misconception
One really common misconception we hear is: "I need to take out credit to build my credit score." In reality Australian banks don't work like that, they care a lot more about a clean credit history with no missed payments than having lots of accounts open.
Property Type and Bank Risk: Security Policy Explained
Finally banks don't just assess you they assess the property too. There are some situations where you can have a strong income, a solid deposit, no credit history issues and still be declined if the property itself doesn't meet the bank's rules.
Every lender has what's called a security policy and that's basically their internal rules around what types of properties they're comfortable lending against.
Common Examples of Restrictions
Some common examples include restrictions on very small apartments often under 40 square metres, high-density developments with lots of identical stock especially if the bank is already lending to others in that building, and rural or large acreage properties which can be harder to resell.
So even if you're pre-approved to a certain amount the bank still needs to be happy with the specific property you buy.
How We Handle This
This isn't something that comes up often but it's why we have a process in place to check properties before we submit a formal approval application. We'll send the address to your preferred lender upfront to make sure there aren't any issues with their security policy.
If it's all clear we move forward with a formal approval application and if there is an issue we can quickly pivot to another lender that does accept the property.
If a bank doesn't want to lend on a type of property and is worried about it don't then push on and think that's really the right type of property you want to buy, it's really a red flag. If the bank's not willing to lend against that property it might be telling you something about the kind of property that you're looking at purchasing.
What You Can Borrow vs What You Should Borrow
Just because a bank is willing to lend you a certain amount doesn't mean that's the amount you should borrow. As a very rough guide banks might lend somewhere around five to six times your income but that number doesn't take into account how you want to live, how comfortable repayments feel to you in your budget, what happens if rates rise or how your income might change over time.
If your income includes things like bonuses, overtime or commission those should be stress-tested in your budget not assumed and if you're planning kids, career changes or lifestyle shifts those need to be factored in too.
This is where having a clear plan and understanding of your budget matters more than the bank's numbers.
Why Speaking to a Broker Early Makes Such a Difference
As mortgage brokers our key role is understanding your goals and visions and then matching the best lender policy to your situation and then matching your specific situation to the lender who puts you in the best position now and into the future.
When you talk to us early we can spot issues upfront, clean up things like credit limits, plan timing around income changes or life events, avoid unnecessary delays and make sure you're matched to the right lender from the start, not just the cheapest one. Down the track we also review your loan regularly to make sure you're not paying a loyalty tax and that your loan stays competitive as your life and the market changes.
If you've got questions please ask, book in a chat with us and we'd love to help out, look at your situation and work out what's best for you.
Final Thoughts
As we've covered today income is the biggest driver of your borrowing capacity but your deposit, debts, dependents, spending, credit behaviour and the property itself all factor in as well.
That's where having the right support early really matters, not just to get approved but to choose the right lender for your situation, at the right time, for the right property, in a way that actually supports your life and future plans.
As a first home buyer there's already a lot of pressure, a lot of things to understand and we can help you through that process and make it very clear, help you understand what the banks are looking for, what things you might need to stop, what things to keep doing and really hone in on what's going to work for your situation and help you feel clear, calm and confident getting into your first property.
If this resource raised questions for you or you're not sure how all of this applies to your situation you can Book a Get to Know You Chat.
