How debt and expenses affect your home loan application
Find out how your debt and expenses influence your home loan application, from calculating serviceability to understanding lender expectations.
Your debts and living expenses directly affect whether a lender will approve your home loan - and how much you can borrow. Lenders need to confirm you can afford repayments today, and if interest rates rise.
This guide outlines how lenders assess your debts, expenses, and credit commitments, and what you can do to improve your borrowing power before you apply. With Unloan, there are no application fees and no ongoing fees, so you can focus on getting your finances in order rather than worrying about upfront costs.
How do lenders assess your financial commitments?
Lenders run a serviceability assessment on every home loan application. This test checks your income against your debts, expenses, and any other financial commitments to confirm you can afford repayments.
Critically, lenders don’t just test at today’s interest rate. Under APRA guidelines, they are required to apply a serviceability buffer of at least 3% p.a. above your loan’s actual rate. If your rate is 6.5% p.a., you’re assessed as though it were 9.5% p.a..
The result of this assessment determines your borrowing capacity - the maximum loan amount the lender considers you can repay. You can estimate yours using Unloan’s borrowing power calculator.
How does debt affect borrowing power?
Existing debt reduces your borrowing power because every dollar committed to debt repayments is a dollar unavailable for mortgage repayments.
Lenders factor in every financial commitment that requires regular repayments, including:
- Personal loans - repayments are deducted from your available income, and higher interest rates mean a larger impact on serviceability
- Car loans - secured loans with fixed repayments that reduce your disposable income for the loan term
- Credit cards - lenders assess your full credit limit, not just the current balance (see dedicated section below)
- Buy now, pay later (BNPL) accounts - since June 2025, BNPL is regulated under national credit laws and treated as a liability by lenders
- Existing home loans - including investment property loans, which are assessed at the buffered rate
- HECS-HELP debt - repayments are income-linked, but they still reduce your net disposable income and are included in serviceability calculations
The more debt you carry, the less income is available for mortgage repayments. Paying off a $500 per month car loan, for example, could increase your borrowing power by $50,000–$80,000.
Worked example - How debt reduces borrowing power
Meet Sarah. She earns $100,000 per year and wants to buy her first home.
Scenario A - No existing debt:
- Gross income: $100,000
- Existing debt repayments: $0 per month
- Estimated borrowing power: ~$550,000
Scenario B - With existing debt:
- Gross income: $100,000
- Car loan: $450 per month
- Credit card limit: $10,000 (lenders may assess a portion of the limit as a monthly commitment)
- Estimated borrowing power: ~$430,000
The difference is roughly $120,000 in borrowing power, depending on the lender and Sarah’s overall situation.
Estimates are illustrative only. Borrowing power varies based on lender criteria, interest rates, expenses and individual circumstances.
How do living expenses affect your home loan application?
Lenders assess your regular household spending to calculate how much income is left over for mortgage repayments after your day-to-day costs.
Common living expenses lenders take into account include:
- Groceries and food - your regular supermarket spend, typically verified against bank statements
- Utilities - electricity, gas, water, internet, and phone bills
- Insurance - health, car, home and contents, and life insurance premiums
- Childcare and education costs - including school fees, after-school care, and dependent-related expenses
- Transport - fuel, public transport, tolls, registration, and vehicle maintenance
- Subscriptions and memberships - streaming services, gym memberships, and other recurring charges visible on bank statements
Lenders compare your declared expenses against industry benchmarks. If your declared spending is lower than the benchmark, most lenders will use the higher benchmark figure instead.
Will cutting expenses before I apply help?
Short-term spending cuts rarely help. Lenders look at your spending patterns over 3–6 months of bank statements, not just the most recent week.
If your historical spending is $4,000/month but you declare $2,500, lenders may question whether your declared expenses are realistic. Focus on genuine, sustainable changes — cancelling unused subscriptions, reducing discretionary spending, and paying off small debts — rather than a last-minute spending freeze.
What is the Household Expenditure Measure (HEM)?
HEM is an industry benchmark that estimates minimum household spending based on your household size and income level. Most Australian lenders use HEM as a floor when assessing your expenses.
If you declare expenses lower than HEM, the lender will use the HEM figure instead. If your actual expenses exceed HEM, the lender uses your declared figure. Either way, the higher number is what counts.
How HEM works in practice
A single person earning $80,000 might have a HEM benchmark of approximately $1,600 per month. If they declare $1,200 per month in expenses, the lender will typically use the higher HEM figure.
A couple with two children and a combined income of $180,000 might have a HEM of approximately $3,200 per month. If their actual spending is $3,800 per month, lenders will generally use the higher declared amount when assessing affordability.
These examples are illustrative only and actual HEM benchmarks vary by lender and individual circumstances.
What is a debt-to-income ratio (DTI)?
Your debt-to-income ratio (DTI) is your total debt divided by your gross annual income. It tells lenders how leveraged you are relative to what you earn.
For example, if you earn $100,000 per year and have $400,000 in total debt, your DTI ratio is 4.
A DTI below 6 is generally considered acceptable by most Australian lenders. A DTI of 6 or above is classified as high-risk. From February 2026, APRA requires banks to limit high-DTI lending (DTI of 6+) to no more than 20% of new mortgage originations.
DTI ratio guide
DTI worked example
James and Priya earn a combined $160,000 per year. They want to borrow $700,000 for a home. They also have:
- Car loan balance: $15,000
- Credit card limit: $8,000
Total debt = $700,000 + $15,000 + $8,000 = $723,000
DTI = $723,000 ÷ $160,000 = 4.52
A DTI of 4.52 is generally considered to be within an acceptable range by many lenders, although outcomes can vary depending on your individual circumstances and the lender’s assessment criteria.
How do credit cards affect borrowing capacity?
Lenders assess your total credit card limit, not the amount you currently owe. A card with a $10,000 limit is treated as $10,000 of potential debt, even if the balance is $0.
Most lenders calculate a notional monthly repayment of roughly 3% of the total credit limit. So, a $10,000 limit adds approximately $300 per month to your assessed obligations, reducing your borrowing power by roughly $30,000–$40,000.
If you have credit cards you rarely use, reducing the limit or closing the account before applying can immediately increase your borrowing power. This is one of the fastest ways to improve your position.
How does HECS-HELP debt affect your home loan?
HECS-HELP debt can reduce your borrowing power, but it works differently from other types of debt.
Repayments are income-linked, they’re automatically deducted from your pay once your income exceeds a certain threshold (currently $67,000 for the 2025-26 income year).
Because HECS repayments lower your take-home pay, lenders generally treat them as a recurring obligation that reduces your net disposable income. For example, someone earning $85,000 may have HECS repayments of roughly $2,700 per year ($225 per month), based on current repayment thresholds where repayments are calculated on income above the minimum threshold.
Some lenders assess HECS differently to other types of debt.
If you’re close to paying off your HECS balance, it may be worth clearing it before applying. Higher-interest debts like credit cards or personal loans, can also have a have a larger impact on your borrowing power per dollar.
How does buy now, pay later (BNPL) affect your application?
Since June 2025, BNPL providers like Afterpay and Zip are regulated under Australian credit laws. This means BNPL accounts are now treated as formal credit products by lenders.
BNPL can affect your home loan application in three ways:
- Liability: Your BNPL credit limit is treated as potential debt, similar to a credit card limit.
- Bank statements: BNPL repayments appear on your statements and lenders factor them into expense calculations.
- Credit reporting: Missed BNPL payments can now appear on your credit report and lower your credit score.
Before applying for a home loan, consider paying off any BNPL balances, close unused accounts, and reduce your BNPL limits. Even a small active BNPL account can reduce your borrowing power.
How can reducing debt improve your borrowing power?
Reducing your debt directly increases borrowing power. Every dollar freed from existing repayments is a dollar the lender can allocate to mortgage repayments.
Practical steps to boost your borrowing power before applying:
- Pay down or clear personal loans to reduce ongoing repayment commitments
- Reduce credit card limits if they are higher than what you need
- Close unused credit accounts as every open credit facility counts as potential debt, even with a $0 balance
- Consolidate debts into a single, lower-rate loan - this can reduce total monthly repayments and simplify your application
- Review BNPL accounts including closing unused accounts or reducing limits
- Check your credit report for any errors or old defaults that can drag down your score. Request a copy from Equifax, Experian, or Illion
How Unloan assesses borrowing capacity
Unloan assesses your borrowing capacity using the same core factors: income, debts, living expenses, and credit history. The key difference is what happens after approval.
With Unloan, you get:
- No application fees*
- No ongoing fees*
- An annual loyalty discount that gets better every year (up to 30 years)
- Unlimited access to redraw
- An online application
Ready to see how much you could borrow? Use Unloan’s borrowing power calculator to get an estimate.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. If you currently have an Unloan home loan with an active Lender’s Mortgage Insurance (LMI) policy the maximum amount you can borrow across all Unloan loans is $3,000,000. Please note Unloan currently doesn’t offer loans with an LMI premium. In some cases, depending on the property’s location or type, we may only be able to lend you up to 70% of the property’s value.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Unloan is a division of Commonwealth Bank of Australia, and Commonwealth Bank does not provide tax (financial) advice under the Tax Agent Services Act 2009 (Cth). You should consider seeking independent tax advice from a registered tax agent, accountant or adviser before you make any decisions based on this information.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. If you currently have an Unloan home loan with an active Lender’s Mortgage Insurance (LMI) policy the maximum amount you can borrow across all Unloan loans is $3,000,000. Please note Unloan currently doesn’t offer loans with an LMI premium. In some cases, depending on the property’s location or type, we may only be able to lend you up to 70% of the property’s value.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The loyalty discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
