How Existing Debts Can Quietly Reduce Your Borrowing Power

You have a stable job, a solid deposit, and no missed repayments. The home loan should be straightforward. Then the assessment comes back lower than expected, sometimes by tens of thousands of dollars, and nobody told you why.

Most of the time, it is not your income. It is your existing debts. This is something many first-home buyers and refinancers working with a mortgage broker in Oakleigh South, as well as borrowers across Oakleigh, Clayton, Clarinda, Bentleigh and Bentleigh East, discover only after they have already started the home loan application process. 

Not just the obvious ones, a car loan or personal loan, but the ones that sit quietly in the background: a credit card you rarely use, a HECS balance you have been ignoring, and a buy-now-pay-later account opened two years ago. Lenders count all of them. And the cumulative impact on borrowing power in Australia is larger than most borrowers expect.

The Mechanics: How Debt Gets Counted

Every lender in Australia uses a borrowing capacity assessment to determine how much you can safely borrow. Lenders generally assess home loan applications using the borrower’s loan rate plus APRA’s 3-percentage-point serviceability buffer. With many borrowers facing variable rates in the mid-6% range, lenders may assess some applications at around 9% or higher once the serviceability buffer is applied. 

On top of that, every existing debt commitment reduces the income surplus a lender can count. The formula is simple: income minus commitments minus living expenses equals serviceable surplus. Every extra commitment on that list shrinks the surplus, and the surplus determines the loan size.

Here is what that can look like in practice, depending on lender policy and borrower circumstances:

• A $10,000 credit card limit may reduce borrowing capacity by tens of thousands of dollars, depending on lender policy and borrower circumstances.

Lenders commonly assess a percentage of your total credit card limit as a monthly commitment, regardless of your actual balance. Even a credit card you rarely use may reduce your borrowing capacity.

• HECS obligations can materially reduce borrowing capacity, depending on income, repayment requirements and lender assessment policies.

Lenders include mandatory HECS repayments when assessing serviceability. The impact varies between borrowers and lenders and can affect the amount available to borrow.

• A recurring car loan repayment can significantly reduce borrowing capacity, although the exact impact varies between lenders and individual circumstances.

Every recurring debt repayment reduces the surplus income lenders can use in their serviceability calculations. Car loans, personal loans and hire purchase agreements are all considered during assessment.

Also Read: Refinancing in 2026: When It Saves You Money and When It’s a Trap

The 2026 DTI Cap: A New Layer of Pressure

From February 2026, APRA requires ADIs to limit new residential mortgage lending with a DTI ratio of 6 or higher to 20% of new lending, applied separately to owner-occupier and investor portfolios. Total debt may include the proposed mortgage and existing credit commitments such as personal loans, car loans and credit card limits. HECS/HELP obligations are also considered in serviceability and may affect borrowing capacity.

As a simple illustration, a borrower earning $100,000 may face a total debt threshold around $600,000 under a 6x DTI measure. Existing debts can reduce the room available for a new mortgage, although the final result depends on lender policy and serviceability assessment.

Non-bank lenders are not ADIs and are not subject to APRA’s DTI cap in the same way, but they remain regulated under Australian credit laws and apply their own lending policies. A specialist non-bank lender may assess the same application differently, although approval will always depend on credit policy, serviceability and responsible lending requirements.

The Highest-Impact Actions Before You Apply

Not all debts are equal in their effect on borrowing power. Some can be addressed quickly; others take longer. These actions, taken before application, consistently move the number:

• Close unused credit cards: the limit matters, not the balance. Even an unused credit card can reduce borrowing capacity because lenders commonly assess the available credit limit as an ongoing financial commitment. 
• Reduce or consolidate personal debt: car loans and personal loans are generally included in serviceability assessments, and the impact depends on the repayment amount, remaining term and the lender’s policy.
• Consider HECS strategy: if your HECS/HELP balance is small and close to being cleared, paying it off before applying may improve borrowing capacity with some lenders. The impact depends on income, repayment rate and lender policy.
• Choose the right lender: different lenders assess HECS, overseas income, and credit card limits differently. The lender that gives you the best outcome is not always the one with the lowest rate

Frequently Asked Questions

Q: Does the balance on my credit card affect my borrowing power, or just the limit?

Answer: The limit, not the balance. Lenders commonly assess a percentage of your total credit limit as an ongoing commitment regardless of what you owe. Even an unused credit card may reduce borrowing capacity.

Q: Can I pay off my HECS before applying to increase my borrowing power?

Answer: Yes, and for some borrowers it is genuinely worth doing. If your HECS balance is small and you can clear it before applying, lenders remove the repayment from their serviceability calculation, which may improve borrowing capacity depending on income, repayment obligations and lender policy.

Q: Are non-bank lenders a legitimate option if I have high existing debt?

Answer: Yes. Non-bank lenders are regulated by ASIC and not subject to APRA’s DTI cap, so they assess total debt levels under different criteria. For borrowers hitting the 6x income ceiling at major banks, a non-bank lender may assess the application differently, but approval is not guaranteed and depends on the borrower’s overall position.

Where Safe Haven Finance Helps

Payal Varma at Safe Haven Finance has 20+ years of banking and mortgage experience and works with a panel of more than 50 lenders, including specialist lenders who assess borrowing capacity more flexibly for borrowers with existing debt commitments. Safe Haven Finance assists clients across Oakleigh South, Oakleigh, Clayton, Clarinda, Bentleigh and Bentleigh East, helping borrowers understand how existing debts affect their home loan borrowing capacity before they apply. Before you apply, the team models your position across multiple lenders to find which one gives you the best outcome for your specific debt profile.

A formal credit enquiry may remain on your credit file for several years, so it is worth choosing the right lender before applying. Getting the right lender selection before you apply is not just about rate; it is about protecting your ability to borrow at all. 

Whether you are purchasing your first property, refinancing an existing loan, or upgrading to a larger home, obtaining professional mortgage advice before applying can help maximise your borrowing power and avoid unnecessary credit enquiries.

Book a free consultation at safehavenfinance.com.au or call +61 433 564 936. Follow Safe Haven Finance on Instagram, Facebook, and LinkedIn for practical finance updates.