How Existing Debts Shape Borrowing Capacity and Servicing Outcomes

All existing financial commitments influence borrowing capacity.

In Australian lending, serviceability is not determined by income alone.

It reflects the entire financial structure surrounding a borrower, including:

repayments already in place
potential obligations that could arise
buffers designed to protect against future stress

Because of this, borrowing capacity is best understood not as

what income appears to allow, but as:

what income can safely support after every existing obligation

has been recognised and stress-tested.

This page explains how lenders assess existing debts,

why even unused credit facilities can materially reduce borrowing power,

and why borrowing capacity can decline despite stable or rising income.

It does not assess individual borrowing ability.

The core lending question behind serviceability

Borrowers often assume lenders ask:

Can this person afford the new loan today?

In practice, lenders test a more conservative question:

Could all debts still be repaid

if interest rates rise, expenses increase,

or income becomes less reliable in future?

This forward-looking stress test underpins

modern Australian serviceability assessment.

Every existing debt therefore reduces the income margin available

to absorb uncertainty.

Liabilities typically included in servicing assessment

Serviceability calculations generally recognise a wide range of commitments, including:

owner-occupied and investment home loans
personal loans and vehicle finance
credit cards and revolving lines of credit
buy-now-pay-later facilities where applicable
other ongoing repayment obligations captured within lender policy

Importantly, credit cards are usually assessed at their approved limit,

even when the card is not currently used or carries a zero balance.

This reflects the possibility that the full limit

could be drawn at any time.

As a result:

Unused credit can still reduce borrowing capacity.

Why assessed repayments often exceed real repayments

Borrowers frequently notice that lenders treat debts as

larger than they feel in everyday life.

This occurs because servicing models commonly apply:

assessment interest rates above current contract rates
minimum repayment assumptions for revolving credit
policy-driven buffers designed to absorb future change

As a result, existing debts may consume

more servicing capacity on paper

than in a household budget.

From a credit-risk perspective, this reflects:

resilience testing rather than present-day comfort.

Differences between lenders in how debts are assessed

Not all lenders treat existing liabilities in exactly the same way.

Depending on policy settings, a lender may:

apply stressed or buffered repayment assumptions
use minimum repayment percentages for revolving credit
assess debts at higher notional interest rates
in some cases, recognise actual repayment amounts
rather than buffered figures

These policy differences can lead to material variation in borrowing capacity

between lenders, even where a borrower’s financial position is unchanged.

This explains why:

servicing outcomes are partly borrower-specific

and partly lender-policy-specific.

The cumulative effect of multiple smaller debts

It is often assumed that only large debts meaningfully affect borrowing power.

In practice, several modest liabilities can reduce borrowing capacity

as much as a single major loan because:

each debt carries its own stressed repayment assumption
buffers apply across multiple facilities
minimum repayments accumulate simultaneously

The result is a layered contraction of usable income,

even where individual debts appear manageable.

Why debts close to being repaid may still reduce borrowing capacity

Borrowers often expect that a loan nearing completion —

such as a car loan with only one or two repayments remaining —

will have little or no impact on a new borrowing assessment.

In practice, servicing models do not always treat near-term repayments

as immediately disappearing.

Depending on lender policy and timing of assessment:

the existing repayment may still be included in full
the debt may be assumed to continue for servicing purposes
only confirmed closure or refinance may remove the obligation

This reflects a conservative credit-risk approach:

Serviceability is assessed on verified current commitments,

not expected future changes.

When borrowing capacity falls despite financial stability

One of the most confronting lending experiences occurs when:

income has remained steady or increased
repayment history is strong
overall financial behaviour appears responsible

yet borrowing capacity has reduced rather than improved.

This can arise from:

higher system-wide assessment interest rates
gradual accumulation of smaller debts
rising living-expense benchmarks
tightening lender policy or regulatory settings

To borrowers, this may feel confusing or unfair.

Within the credit system, it reflects:

portfolio-level risk control rather than individual judgement.

The moment borrowers usually realise what is happening

For many people, the turning point comes during a borrowing assessment where:

income looks strong
property values may have risen
financial behaviour feels responsible

yet the maximum borrowing figure is lower than expected.

This moment often creates confusion, because the natural assumption is:

higher income should mean higher borrowing power.

What becomes clear instead is a quieter structural truth:

Borrowing capacity is shaped less by how much you earn

and more by the debts you already carry.

Income opens the possibility of borrowing.

Existing debt determines how much of that possibility remains.

Structural interaction between debt, income, and time

Serviceability is not static.

It shifts as:

interest-rate buffers move
debts are added or repaid
policy settings evolve
income stability changes

Borrowing capacity is therefore shaped by:

structure and timing together,

not income in isolation.

The structural role of liabilities in Australian lending

Across the credit system, existing debts function as a:

constraint on future leverage expansion
safeguard against over-borrowing during favourable conditions
mechanism for testing repayment durability under stress
determinant of how much additional risk a lender can accept

For this reason, borrowing outcomes are governed by

the total financial structure, not earnings alone.

This explanation describes the treatment of liabilities in servicing assessment

and is provided as general information only.