The Property Finance Broker

HEM, Buffers and the Numbers Behind the Number the Bank Gives You

One of the most common conversations I have with new clients goes something like this:

“I earn $X, my partner earns $Y, we’ve got minimal debt. Surely we can borrow Z?”

And then the bank’s calculator spits out something that’s hundreds of thousands of dollars less than they expected.

It’s frustrating, and it can make people feel like they’ve done something wrong. They usually haven’t. The real answer is that lenders don’t just look at your income — they run it through a series of filters, buffers and assumptions that quietly chip away at your number before it ever gets to you.

Here’s what’s actually happening behind the scenes, why two lenders will give you different answers on the same income, and what you can do about it.

The 3% Buffer

Since 2021, APRA has required lenders to assess your loan as if the interest rate were 3% higher than the rate you’d actually pay.

So if your loan rate is 6.20%, the bank is testing your serviceability at 9.20%.

Example: A $700,000 loan at 6.20% over 30 years has actual P&I repayments of around $4,290 per month. But the bank is assessing you at roughly $5,700 per month. That’s an extra $1,400 per month you need to “prove” you can absorb on paper.

This is the single biggest reason borrowing capacity comes back lower than people expect. It’s also why two lenders with the same headline rate can give materially different results — the buffer is mandatory, but everything else around it varies between banks, and small differences in assumptions compound into big differences in the final number.

Living Expenses: The HEM Benchmark

Lenders don’t take your declared living expenses at face value. They benchmark them against the Household Expenditure Measure (HEM) — a Melbourne Institute index of “reasonable” spending for households based on size, income and postcode.

Lenders use the higher of your declared expenses or the HEM benchmark.

If you tell the bank you live on $4,000 per month but the HEM for your household sits at $6,500, they’ll use $6,500. There’s no winning by under-declaring — they assume it back up.

The opposite trips a lot of people up too: if your real spending is genuinely higher than HEM — private school fees, regular travel, two car loans, multiple insurances — the bank will use your declared figure, not the benchmark. The three months of bank statements they pull will tell the truth either way, so being accurate matters.

Quick tip: in the 90 days before applying, transactions on streaming, takeaway, and especially gambling apps all get reviewed. It’s not about being judged — it just shifts your assessed expense figure. The cleaner those statements look in the lead-up, the better your number tends to come out.Im not suggesting you alter what life spending is like, rather spend in those 90 days like you would with a new debt in place.

Existing Debts (and the Quiet Killers)

This is where I see the biggest unexpected hits to borrowing capacity.

• Credit card limits, not balances. The bank counts the limit, usually at around 3% per month, as if it were fully drawn — even if you pay it off in full every month. A $20,000 credit card limit is roughly a $600/month commitment in their numbers. Closing or reducing limits before applying is one of the quickest ways to lift your capacity.
• Buy Now Pay Later. Active Afterpay, Zip and similar accounts get treated as ongoing commitments. They’re visible on your statements and lenders factor them in.
• HECS/HELP. Even though it’s a tax-system repayment, lenders treat it as a real liability based on your income. A higher income means a bigger HECS deduction, which trims net income for serviceability. The recent indexation changes haven’t removed it from the assessment — it’s still a real number on the page.
• Personal loans and car loans. Counted at their actual ongoing repayments.
• Existing home loans. Often assessed at the post-IO P&I repayment level over the remaining term, not the current repayment — which can push the assumed cost up significantly if you’re currently on interest-only.

The Way Income Is Treated (Shading)

Lenders don’t always take 100% of your income at face value either.

• Rental income is typically “shaded” to 70–90% to allow for vacancy and ongoing costs.
• Bonuses and commissions are usually averaged over two years and may be shaded to 80%.
• Overtime is often shaded; some lenders use 100% for essential-service workers and 80% for everyone else.
• Government benefits like Family Tax Benefit are accepted by some lenders, ignored by others, or accepted only up to a certain age of dependent children.
• Allowances (car, phone, travel, uniform) are treated differently between lenders — some include them at full value, others shade or exclude them entirely.

If You’re PAYG with Variable Income (Bonuses, Commissions, Overtime)

This is one of the most common scenarios where lender choice makes a five- or six-figure difference to your capacity.

Most lenders want two years of consistent variable income before they’ll count it. Some will accept one year if it’s a documented and ongoing component of your role.

Then comes the shading:

• A 25% commission-based salesperson earning $30,000 in commissions on top of an $80,000 base might find one lender uses $24,000 (80%), another uses $30,000 (100%), and another won’t count it at all if there isn’t a two-year track record.
• Overtime for police, paramedics, and nurses is often treated more generously than overtime for a manufacturing or retail role.
• Bonuses paid quarterly or annually are usually averaged across two years, with the lower amount used.

The practical upshot: if you’ve had a great year, document it clearly. Group certificates, payment summaries, employer letters confirming the income is ongoing and an expected part of the role — all of it helps. And if your last two years vary significantly, the right lender choice can mean the difference between an approval and a decline on the same income.

If You’re Self-Employed

Self-employed clients almost always come to me thinking they can’t borrow much. That’s frequently not the case — but it does require the right lender and the right preparation.

The standard expectation is two years of tax returns and financial statements. Some lenders accept the most recent year only. A small number of specialist lenders will assess on BAS or accountant declarations alone (often called “alt-doc” lending), but these come with higher rates.

Where most self-employed applicants leave money on the table is add-backs — legitimate one-off or non-cash items that reduce taxable income but don’t actually reduce your real cash flow:

• Depreciation.
• One-off expenses (legal fees, equipment write-offs).
• Interest on existing investment loans that the bank is already accounting for separately.
• Director’s superannuation contributions above the minimum.
• Personal-use expenses run through the business.

Different lenders allow different add-backs. With proper accountant evidence, the same business can produce two very different assessable incomes depending on which lender’s policy you’re working with. This is where good preparation, working closely between broker and accountant, genuinely earns its keep.

A Worked Example

Sarah and Tom both earn $100,000 base. Combined household income $200,000. They have a $20,000 credit card limit, a $25,000 HECS debt each, and one $400/month car loan. No kids. They thought they could borrow $1.4m. Here’s a rough sketch of why they couldn’t:

• Net combined income after tax and HECS: ~$11,500/month
• HEM for a couple, no kids, at that income level: ~$4,500/month
• Credit card commitment (limit × 3%): $600/month
• Car loan: $400/month
• Available for loan repayments before buffer: ~$6,000/month
• Required repayment on $1.4m at 9.20% assessed: ~$11,500/month

They actually qualify closer to $1.05m–$1.15m depending on the lender — not $1.4m. With Lender B (who shades rental more favourably and treats HECS slightly differently), the same applicants might land closer to $1.25m. Same income, $200,000 difference in capacity.

What You Can Actually Do

If your number is coming back lower than expected, there are real levers to pull:

• Reduce or close unused credit card limits.
• Pay out small personal loans and BNPL accounts.
• Wait until probation finishes if you’ve just changed jobs.
• Document any non-base income properly (bonuses, overtime, side income).
• If self-employed, get your most recent year lodged and add-backs documented with your accountant before applying.
• Clean up the 90 days of statements that the lender will be pulling.
• Choose the right lender for your situation — the policy differences are real, and this is where most of a broker’s time actually goes.

The Bottom Line

Your “borrowing capacity” isn’t a single number. It’s a different answer at every lender, shaped by buffers, benchmarks, and behind-the-scenes policy. Knowing what’s actually being assessed — and where the levers are — is the difference between being told “you can borrow X” and finding out months later why you actually couldn’t.

Online calculators are a starting point, not an answer. They give you a generic number with no policy nuance, no shading of your actual income types, and no view of the lender that suits your situation best.

If you’ve been knocked back, surprised by an online calculator number, or you just want to know what your real capacity looks like across the market before you start house-hunting — let’s run the numbers properly. No obligation, no hard sell. Just clarity.