You haven't changed jobs. Your income is stable. You've been saving consistently. And yet, when you sat down with a lender or used an online calculator, the number that came back was smaller than you expected. For a lot of Australians in 2026, that's not just a feeling. Borrowing power has genuinely compressed across the market, driven by a mix of broader lending changes and individual financial factors. Understanding exactly what changed and why is the first step to working out what you can actually do about it.
Five Reasons Your Borrowing Power Is Lower in 2026
1. The APRA 3% Serviceability Buffer
Every home loan application in Australia is stress-tested at your actual interest rate plus a 3% serviceability buffer, a guideline set by APRA. With variable rates currently sitting around 6.5%, lenders assess whether you can repay at approximately 9.5%. That gap between your real rate and the assessed rate is the single largest structural reason most borrowers are offered less than they expect. It's not negotiable; every APRA-regulated lender applies it.
2. The New APRA DTI Cap Effective February 2026
From 1 February 2026, APRA introduced a debt-to-income (DTI) cap limiting banks to issuing no more than 20% of new mortgages to borrowers with total debt above six times their gross income. This applies separately to owner-occupier and investor lending. In practice, if your total debt, existing mortgage, car loan, and credit cards, plus the new loan, push your DTI to 6x or above, some banks may decline your application even if your income and credit history are strong. Not because you're a bad borrower, but because the lender has already used up its high-DTI quota for the quarter.
3. Your Credit Card Limits Are Counted, Not Your Balance
Most borrowers are surprised to learn that lenders assess credit card limits as a committed monthly expense, regardless of what you actually owe. Even if you rarely use your card, a higher limit can still reduce your borrowing capacity. Closing or reducing unused cards before applying is one of the fastest ways to improve your borrowing power without changing your income.
4. Living Cost Benchmarks Have Been Revised Upward
Lenders use a standardised measure called the Household Expenditure Measure (HEM) to estimate your living costs when calculating serviceability. In 2025–26, HEM benchmarks were revised upward to reflect the real increase in grocery, insurance, and utility costs across Australia. A higher assumed expense figure means less assessable income available for loan repayments, even if your actual spending hasn't changed. It's a mechanical shift in how lenders calculate what you can afford, and it affects everyone, not just high spenders.
5. Existing Debts Are Reducing Your Assessed Income More Than You Realise
Car loans, personal loans, HECS-HELP debt, and buy-now-pay-later commitments all count against your borrowing power. Each $500 per month in existing repayments typically reduces your maximum home loan by $50,000–$60,000 in a standard serviceability calculation. Borrowers who hold multiple debts without clearing them before applying are often surprised by how significantly they compound. Lenders count all committed monthly debt obligations, and each one eats into the income available to service a new mortgage.
It's Not Just Your Borrowing Power: It's Which Lender You Approach
Here's something most borrowers don't know: borrowing capacity can vary significantly across lenders for the same financial profile. Each lender applies its own HEM benchmark, its own income shading rules for overtime and rental income, and its own credit card treatment. Some lenders assess self-employed income more generously. Others have more flexibility with HECS debt.
Importantly, non-bank lenders are not subject to APRA's DTI cap. They hold Australian credit licences under ASIC and set their own credit policies. If a major bank has declined your application because it's hit its high-DTI quota, a non-bank lender may assess the same application under different criteria and approve it. This isn't a workaround; it's how the two-tiered lending market legitimately operates in Australia in 2026. The real impact of the DTI cap is less about "How much can I borrow?" and more about "Which lender will work for my scenario?.
What You Can Actually Do to Improve Your Borrowing Power
The good news is that most of the factors compressing your borrowing capacity are addressable. The timeline depends on how much work is needed, but these are the highest-impact steps:
• Close or reduce credit card limits: done before applying, this can meaningfully shift your assessed monthly expenses
• Pay down short-term debt: clearing a personal loan or car loan eliminates that committed monthly expense from your serviceability calculation
• Check your DTI ratio before applying: total proposed debt divided by gross income. If it approaches 6x, consider reducing existing debt first or targeting a non-bank lender
• Don't apply to multiple lenders: each application creates a credit enquiry; multiple enquiries in a short window can reduce your score before approval
• Work with a broker before applying anywhere: a broker identifies which lender's assessment model suits your income type and debt profile, and submits one well-prepared application
Read More: Australia House Prices Up 2.1%, 2026 Borrowing Impact
How KM Financial Service Can Help
At KM Financial Service, Kris Menon and the team understand exactly how these 2026 lending changes interact with individual financial profiles. With access to a broad lender panel, including specialist and non-bank lenders not bound by the APRA DTI cap, we can assess your real borrowing capacity across multiple lenders and identify the right fit before any application is submitted. With nearly two decades of experience, the team has worked across a wide range of scenarios, helping borrowers navigate complex lending conditions with clarity and confidence.”
FAQ: Does the APRA DTI cap affect all lenders?
Answer: No, it applies only to APRA-regulated banks and credit unions (ADIs). Non-bank lenders operate under ASIC's framework and are not subject to the cap. If a major bank declined your application due to a high DTI, a non-bank lender may still approve it. KM Financial Service works across both channels and will identify the right fit for your situation.
Lower Borrowing Power Doesn't Mean No Borrowing Power
The 2026 lending environment is tighter than it was two years ago; that's real. But borrowing power is not fixed, and a lower number from one lender is not the final answer. Understanding which factors are compressing your capacity, which are fixable before you apply, and which lender is best suited to your profile are three questions that a broker answers before a single application goes in. That's the work KM Financial Service does for every client.
Book a consultation with KM Financial Services, or call 0402 879 531. Kris and the team will calculate your real borrowing capacity, identify the right lender, and give you a clear path forward.
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