Why Has My Borrowing Capacity Dropped Even Though My Salary Hasn’t Changed?

You checked your borrowing capacity a few months ago.

You earned roughly the same income you do now. You haven't suddenly taken out a massive car loan. Nothing about your financial position feels dramatically different.

But now you're being told you can borrow less.

How?

This can be incredibly frustrating, especially if you've already started looking at properties based on an earlier borrowing estimate.

The important thing to understand is that your borrowing capacity isn't determined by your salary alone.

Banks also look at interest rates, your existing debts, your living expenses, your dependants and their own lending policies.

So even when nothing has changed for you, the number a bank is willing to lend can change.

Here's why.

Interest Rates Can Change Your Borrowing Capacity

One of the biggest factors is interest rates.

When a bank considers your home loan application, it doesn't simply ask whether you could afford the repayments at the interest rate you're being offered.

Banks are required to assess whether you could continue making repayments if interest rates were higher.

APRA, the regulator overseeing Australian banks, currently maintains a mortgage serviceability buffer of 3 percentage points.

That means if the interest rate on a loan was 6%, for example, a bank may assess your ability to repay it at around 9%.

This is designed to make sure borrowers have some breathing room if rates or expenses increase.

But it also means changes in interest rates can affect how much you can borrow, even if your income hasn't changed.

Your Existing Debts Matter More Than You Might Think

It's not only your home loan that the bank looks at.

Your existing debts can include:

Credit cards
Car loans
Personal loans
HECS/HELP debt
Buy Now Pay Later accounts
Existing home or investment loans

These commitments can reduce the amount of income the bank considers available for your new mortgage.

Credit cards are an especially interesting one.

A bank may consider the credit limit available to you, rather than simply looking at whether you've paid your card off this month.

So having a $15,000 credit card limit that you barely use can still affect an application.

APRA's residential mortgage lending guidance specifically includes debts such as credit cards, personal loans, Buy Now Pay Later and HECS/HELP when considering a borrower's overall debt position.

Your Living Expenses Are Part of the Calculation

Banks also need to consider what it costs you to live.

Think groceries, childcare, insurance, transport, utilities, subscriptions and your general household spending.

This doesn't mean you need to stop buying coffee for three months before applying for a home loan.

But it does mean the bank needs a realistic picture of your household expenses.

APRA expects lenders to assess a borrower's income and expenses rather than simply assuming everyone with the same income has the same amount of money available for a mortgage.

A couple earning $180,000 with no children and low expenses may therefore have a very different borrowing capacity from a household earning the same amount with two children, childcare costs and a car loan.

Same income.

Very different financial commitments.

Different Banks Can Give You Different Answers

This is the part many first home buyers don't realise.

There isn't one universal borrowing capacity number that follows you from bank to bank.

Different lenders can treat parts of your financial situation differently.

This can include how they assess certain types of income, overtime, bonuses, commissions, rental income and your existing commitments.

For example, APRA notes that lenders may apply discounts to variable or less certain income when assessing a mortgage application.

So being told you can borrow a particular amount by one bank doesn't necessarily mean every lender will reach exactly the same number.

It also doesn't automatically mean the lender offering the highest borrowing capacity is the right lender for you.

The goal isn't necessarily to borrow the absolute maximum a bank will approve.

It's to work out what makes sense for your life as well.

The Property Market May Not Be the Only Thing Moving

This is why borrowing capacity is worth checking again before you become emotionally attached to a particular price range.

Interest rates and lender policies can move.

Your circumstances can change.

And sometimes the amount you were told six months ago simply isn't the amount you'll be approved for today.

Current Reserve Bank data shows that interest rates on new Australian owner-occupier home loans remain above 6% on average.

For someone buying their first home, relatively small changes in borrowing capacity can make a meaningful difference to the properties they're able to consider.

Could a Government Scheme Help?

If borrowing capacity or your deposit is making your first home difficult to reach, it's also worth checking whether you qualify for one of the Australian Government's home buyer programs.

For example, the Australian Government 5% Deposit Scheme allows eligible first home buyers to purchase with a minimum 5% deposit without paying Lenders Mortgage Insurance.

The Australian Government's Help to Buy Scheme works differently. It is a shared equity scheme where eligible buyers can purchase with a minimum 2% deposit and the Government contributes up to 30% of the purchase price of an existing home or 40% of a new home.

These schemes have different eligibility requirements and they won't be suitable for everyone.

Your Borrowing Capacity Is a Starting Point, Not a Spending Target

This is probably the biggest thing I want first home buyers to remember.

Just because a bank says you can borrow $800,000 doesn't mean you need to borrow $800,000.

Your home loan still needs to fit around the rest of your life.

Holidays. Childcare. Restaurants. Starting a family. Changing careers. Building savings. Or simply having enough money left over each month that your mortgage doesn't consume your entire life.

The borrowing capacity number tells us what may be possible.

Then we work out what feels comfortable for you.

If you're thinking about buying your first home and want to understand what your numbers look like, you can book a chat with April Six.

We'll go through your income, deposit, debts and expenses and help you understand where you stand before you start making decisions.

Want to chat more about your credit? Book a free chat with me by clicking here.

Any information or advice contained on the April Six Pty Ltd website is general in nature only and has been prepared without considering your individual personal objectives, financial situation or requirements. Before acting or relying on this information, you must consider the appropriateness of this information with regard to your individual circumstances and objectives.

April Six Pty Ltd is a Credit Representative of Astute Financial Management Pty Ltd | Australian Credit Licence 364253

Eshanee Collins is the founder of April Six, a Sydney-based mortgage broker for first home buyers and first-time property investors across Australia.

Why Has My Borrowing Capacity Dropped Even Though My Salary Hasn’t Changed?