First Home Buyer Guide Episode 3: How Do Lenders Calculate Borrowing Capacity? The Deposit Adequacy Test Explained
- Lenny Briffa
- Apr 15
- 3 min read
Updated: Jul 24
How Do Lenders Calculate Borrowing Capacity?
When you ask "how much can I borrow?", lenders don't just look at your income. Working out your home loan borrowing power involves two main checks, and understanding both gives you real insight into your estimated borrowing power before you even speak to a broker.
The Repayment Test: lenders calculate whether you could still comfortably make your loan repayment even if interest rates rose. They take your income, subtract your living expenses and any existing debts (personal loans, credit card limits, car loans), and apply an interest rate buffer - typically an extra 1-3% on top of the actual rate - to make sure you're not stretched too thin if rates increase during your loan term.
The Deposit Adequacy Test: covered in detail below.
Every lender calculates these slightly differently, which is exactly why the loan amount one bank offers can differ meaningfully from another for the same borrower with the same income.
The Deposit Adequacy Test Explained
The deposit adequacy test looks at whether you have enough deposit to meet a lender's requirements - and, just as importantly, where that deposit came from.
Most lenders want to see "genuine savings" - money you've saved yourself over a period of time (usually 3 months or more), rather than a lump sum that appeared in your account overnight. This is important information to know early, since it affects how you should be saving well before you apply.
If your deposit is below 20%, you'll typically need Lenders Mortgage Insurance (LMI), which protects the lender (not you) in case you default. Government schemes and family guarantees can help you avoid this - a guarantor uses equity in their own property to boost your deposit position without you needing the cash saved.
Who Assesses Your Borrowing Capacity? Banks vs Credit Unions
It's not just the big four banks setting these rules. Credit unions and other deposit-taking institutions each apply their own version of the repayment and deposit adequacy tests - and their policies can differ meaningfully from a major bank's.
This is one of the most useful things a mortgage broker does: comparing loan types and home loan options across banks, credit unions, and non-bank lenders to find the one whose specific criteria suit your situation best - rather than assuming the first "no" you get is the final word.
How to Increase Your Borrowing Power
A few practical, genuinely effective ways to increase your borrowing power before you apply:
Reduce your credit card limits. Lenders assess your total approved credit limit, not your current balance - even a card sitting at $0 with a $10,000 limit counts against you.
Pay off or consolidate personal loans. Existing debt directly reduces what you can borrow, dollar for dollar.
Tighten everyday spending in the months before you apply. Buy-now-pay-later services, subscriptions, and frequent takeaway all count as living expenses lenders review.
Consider a co-borrower. Buying with a partner, sibling, or friend can significantly boost your combined borrowing power - our guide to co-buying with friends covers what to consider before going down this path.
Want a starting figure before you speak with us? Our borrowing power calculator gives you an estimated borrowing power based on your income and expenses. Keep in mind this is only a guide - your actual loan amount depends on the specific lender, current interest rate, and fees and charges apply that vary between lenders and loan types.
This is Episode 3 in our First Home Buyer video series. If you haven't already, check out Episode 2: Choosing Loan Features to see how your loan structure affects your repayments.
Ready to find out exactly what you can borrow? Apply now and we'll walk you through it.
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