How Banks Actually Calculate Borrowing Power

One of the most common questions I get is simply, how much can I actually borrow. The honest answer is that it depends on far more than your salary. Banks run your entire financial picture through what is called a serviceability assessment, and understanding roughly how that works helps you plan properly rather than guess.

How income is assessed

Your base salary or wages are the starting point, but lenders do not simply take your gross income and apply a multiple to it. They look at your net position after estimated tax, then apply their own assessment of what portion of that income could reasonably service a mortgage on top of your other commitments.

Regular, guaranteed income is treated the most favourably. Overtime, bonuses, and commission are often included, but usually only at a discounted rate, or only once there is a consistent history of receiving them, since lenders are cautious about relying on income that could disappear.

Living expenses

This is a section of the application that surprises a lot of first time borrowers with how detailed it gets. Banks are required under responsible lending obligations to properly understand your actual living expenses, not just accept a generic estimate. This typically means reviewing recent bank statements and asking about your regular spending on things like groceries, transport, insurance, subscriptions, and general lifestyle costs.

A practical tip here. In the few months before applying, it is worth being mindful of your spending patterns, since lenders are looking at real, demonstrated behaviour rather than a budget you intend to stick to in future.

Existing debt, credit cards, and buy now pay later

Any existing debt reduces your borrowing power, but not always in the way people expect. Credit cards are assessed on their full limit, not your current balance, on the basis that you could draw on the entire limit at any time. This means an unused credit card with a high limit can meaningfully reduce what you are able to borrow, simply by existing.

Buy now pay later services are increasingly factored into assessments as well. Even if you pay them off responsibly, an active buy now pay later account can be treated as an ongoing commitment. If you are planning to apply for a mortgage in the near future, reducing credit card limits you do not need and closing buy now pay later accounts you are not using is one of the more effective, and most overlooked, ways to improve your position.

Boarder and flatmate income

If you have a boarder or plan to once you purchase, some lenders will allow a portion of that income to be included in your serviceability, though usually at a conservative rate and often capped, or requiring specific conditions to be met. This varies meaningfully between lenders, so if boarder income is an important part of your plan, it is worth raising directly rather than assuming every bank treats it the same way.

Rental income

For existing rental properties, or a property you intend to rent out, lenders generally apply a discount to the actual or expected rental income, commonly assessing somewhere around 65 to 75 percent of the gross rent, to allow a margin for vacancy, maintenance, and management costs. The exact discount and approach differs by lender, and by whether the property is existing or newly purchased.

Self employed income

Self employed applicants are assessed differently to salaried employees, and this is an area where I genuinely add a lot of value as an adviser. Lenders typically want at least two years of financial statements and tax returns, and they will look at your net profit rather than your total revenue. Add backs for genuinely one off or non cash expenses can sometimes be included, but this needs to be presented properly and supported by your accountant, not simply asserted.

Fluctuating income, retained earnings left in a company rather than drawn as salary, and GST obligations are all things that different lenders weigh differently. This is one of the areas where taking your application to the wrong lender first can result in a much lower approval than you would have received elsewhere.

A practical example of how this plays out. Two self employed applicants with identical net profit over the past two years can receive quite different assessments depending on whether their income has been trending upward, staying flat, or declining, since most lenders will average the two years but some place more weight on the most recent year if it shows genuine, sustained growth. Having a clear letter from your accountant explaining the trend, rather than leaving the lender to interpret raw numbers on their own, often makes a real difference to how favourably your application is assessed.

Stress tested interest rates

Lenders do not assess your ability to repay at today's interest rate. They apply a stress test, calculating your repayments at a notably higher rate than what you would actually be paying, to make sure you could still comfortably service the loan if rates rise in future. This stress rate moves over time and differs slightly between lenders, which is part of why your maximum borrowing amount can shift even when your income has not changed.

Why different lenders offer different amounts

Given everything above, it makes sense that the same person can receive quite different maximum loan offers from different banks. Each lender has its own policies around overtime and bonus income, its own approach to rental and boarder income, its own stress test rate, and its own appetite for self employed or lower deposit lending. This is precisely why comparing across multiple lenders matters, rather than accepting the first number you are given.

There is also a broader regulatory factor worth understanding, known as debt to income restrictions. Beyond each lender's individual serviceability assessment, banks in New Zealand also operate within limits set by the Reserve Bank around how much they can lend relative to a borrower's gross income, particularly for owner occupiers borrowing above a certain multiple of income. Most borrowers never bump into this limit, since ordinary serviceability assessments tend to be the binding constraint first, but for higher income borrowers with a small deposit, or those looking to borrow a large multiple of their income for an investment property, debt to income restrictions can become the actual limiting factor rather than affordability in the traditional sense. This is another reason the same income can produce different maximum loan amounts at different lenders, since each bank manages its own exposure to these limits slightly differently.

A few things most borrowers do not know

• Unused credit card limits count against you. Reducing limits you do not need before applying can genuinely increase your borrowing power.
• Your spending in the months before applying matters more than your intentions going forward. Lenders assess demonstrated behaviour, not promises.
• Buy now pay later accounts are increasingly scrutinised. Closing ones you do not use is a simple, practical step.
• The lender you approach first is not necessarily the one that will lend you the most. Policies genuinely differ enough to matter, particularly if you are self employed or relying on rental or boarder income.

Frequently asked questions