How lenders assess home loan serviceability

When a lender assesses serviceability, it is testing one question: after your living expenses, your existing commitments and a mandatory interest-rate buffer, can your verified income cover the repayments on the loan you have asked for? This is why your borrowing power is not the number a repayment calculator produces. The calculator prices the loan at the advertised rate; the lender must test you at a materially higher one, discounts parts of your income, and counts debts you may not think of as debts.

Two layers of rules sit behind every assessment. The first is prudential and applies to banks: under Attachment C of Prudential Standard APS 220, APRA-regulated banks and other authorised deposit-taking institutions (ADIs) must apply a serviceability buffer, and Prudential Practice Guide APG 223 (current version dated 19 June 2025) sets out APRA’s view of prudent practice on income, expenses and debts. The second is responsible lending law and applies to every consumer lender and broker: under Chapter 3 of the National Consumer Credit Protection Act 2009, a credit licensee must make reasonable inquiries about your financial situation, requirements and objectives, take reasonable steps to verify your financial situation, and assess that the proposed credit contract is “not unsuitable” for you — see ASIC’s responsible lending guidance (Regulatory Guide 209). You can request a written copy of that assessment.

The distinction matters for non-bank lending: APRA’s buffer and lending limits apply to APRA-regulated banks and other ADIs, while non-bank lenders sit outside APRA’s prudential framework. All consumer lenders, bank or non-bank, remain subject to responsible lending law.

The best-known number in serviceability is the serviceability buffer. ADIs must assess whether you could still meet repayments at an interest rate at least 3.0 percentage points above the loan’s rate — an enforceable requirement under Attachment C of APS 220 “unless determined otherwise by APRA”, not merely guidance. The buffer moved to 3 percentage points on 6 October 2021, up from the previous common practice of 2.5, and APRA confirmed on 28 May 2026 that the mortgage serviceability buffer will remain at 3 percentage points.

The buffer is applied to the loan’s actual ongoing rate, ignoring any discounted introductory or honeymoon rate offered for a limited period at origination — a discounted first year does not lower the rate you are assessed at. (Choosing a rate structure is a separate decision: see our fixed versus variable decision framework.) APG 223 also says a prudent ADI would use the buffer in conjunction with an interest rate floor — a minimum assessment rate that keeps the test meaningful when market rates are low. Each lender sets its own floor rate; APRA does not publish them.

The buffer is not only for the new loan. APRA expects ADIs to fully apply buffers and floor rates to both a borrower’s new and existing debt commitments — so an existing investment loan is also tested at a buffered rate when you apply for the next one.

Lenders do not take every dollar of income at face value. APG 223 says a prudent ADI would discount or disregard temporarily high or uncertain income, with significant discounts generally applied to reported bonuses, overtime, rental income on investment properties, other investment income and variable commissions — and describes discounts of at least 20 per cent on most types of non-salary income as prudent practice, with higher discounts appropriate in some cases. These are APRA’s view of sound practice, not fixed universal percentages: each lender’s credit policy sets its own “shading”, which is one reason identical payslips can produce different borrowing power at different lenders. If much of your income is variable or you work for yourself, see our guide to self-employed borrowing capacity.

Rental income gets particular attention. In APRA’s view, prudent serviceability policies incorporate a minimum haircut of 20 per cent on expected rental income, with larger haircuts appropriate for properties where there is a higher risk of non-occupancy — and a prudent ADI would also account for the fees and expenses that come with an investment property, such as strata.

On the expense side, lenders typically use a benchmark — the Household Expenditure Measure (HEM) or the Henderson Poverty Index (HPI) — inside their loan calculators. APRA is explicit that relying solely on these indices generally would not meet its requirements for sound risk management: it expects ADIs to use the greater of your declared living expenses or an appropriately scaled version of the benchmark, with the index scaled by a margin linked to your income.

Existing commitments are verified, not taken on trust: APG 223 expects a prudent ADI to have effective procedures to verify a borrower’s existing debt commitments and to take reasonable steps to identify undeclared ones. Three treatments surprise borrowers most often.

• Credit cards are assessed on the limit, not the balance. APG 223’s example of prudent practice is a repayment obligation of 3 per cent per month of the total committed limit on credit cards and other revolving facilities — so a card you clear every month can still consume borrowing capacity. The exact method varies by lender, and many borrowers discuss reducing or closing unused limits with their lender or broker before applying.
• HELP debts count. APRA expects a lender to consider HELP obligations alongside other debt commitments, because compulsory repayments are deducted from gross income and are not available to service a mortgage. Under APRA’s current guidance a lender may, per its own policy, remove HELP repayments from the assessment where the debt is expected to be repaid within 12 months through compulsory repayments — a lender-by-lender decision, not an automatic rule.
• Interest-only loans are tested on the shorter tail. APRA expects capacity to be assessed on principal-and-interest repayments over the specific term those repayments apply to, excluding the interest-only period — a shorter effective repayment term, which pushes the assessed repayment higher.

Your credit report sits alongside all of this. It records your repayment history, the credit products you hold, defaults, credit applications, financial hardship information and any bankruptcy or debt agreements, and credit providers look at that history in deciding whether to lend. You can get a free copy of your report every three months from each of the two main credit reporting bodies, Experian and Equifax, and depending on the agency your score sits on a scale up to either 1,000 or 1,200 — see Moneysmart on credit scores and credit reports.

Since February 2026 a second macroprudential setting has operated alongside the buffer. APRA announced on 27 November 2025 that ADIs must limit new residential mortgage lending at a debt-to-income (DTI) ratio of 6 or more to 20 per cent of all new mortgage lending, measured quarterly and applied to owner-occupier and investor portfolios separately. Bridging loans for owner-occupiers and loans for the purchase or construction of new dwellings are exempt. APRA confirmed on 28 May 2026 that the DTI limits remain unchanged.

Within APRA’s requirements and responsible lending law, every lender writes its own credit policy: interest rate floors, income shading percentages, expense benchmarks, and the treatment of credit limits, HELP debt and DTI headroom all vary. The same applicant, with the same documents, can receive materially different maximum loan amounts from different lenders — which is why nothing in this guide is an assessment of your situation.

A broker’s role in all of this is navigating lender policy within a legal duty: when suggesting a loan, mortgage brokers must act in the borrower’s best interests — see Moneysmart on using a mortgage broker and our glossary entry on the best interests duty. In most residential lending scenarios, the lender pays broker commission. We explain remuneration in our Credit Guide. If you want serviceability tested against your actual circumstances rather than in general terms, that conversation usually starts with pre-approval.

If repayments later become difficult, or you believe an assessment or hardship request was handled badly, raise it with the lender first. If it is not resolved, the Australian Financial Complaints Authority accepts complaints from consumers about member financial firms — including credit, finance and loans, and financial hardship situations such as a declined repayment-variation request — and its service is provided to complainants at no charge (1800 931 678): see how to make a complaint to AFCA.