Your borrowing capacity isn't determined by what you think you can afford.
Lenders use a serviceability assessment to calculate how much they'll lend you, and that number often surprises buyers who haven't run the calculations beforehand. Knowing this figure before you start looking at properties in Wellington saves you from falling for a home on the Miramar peninsula that sits $100,000 beyond what any bank will approve.
What Lenders Actually Count in a Serviceability Assessment
Serviceability assessment measures whether your income can cover loan repayments plus your other financial commitments, with room left over for living expenses. Banks test your application against their own servicing calculator, which adds a buffer rate above current mortgage rates and applies standardised expense estimates based on your household size.
Consider a couple earning a combined $140,000 annually looking at properties in Kelburn. They have a car loan with $380 monthly repayments and no other debt. The lender doesn't just look at whether they can afford repayments at today's rates. They test the loan at a rate typically 2-3% higher than the actual rate you'll pay, then subtract their estimate for household expenses, the car loan commitment, and any other recurring costs. What remains determines the maximum loan they'll approve.
In this scenario, the couple might assume they can service a $700,000 home loan based on their current budget. But after the bank applies its test rate and expense assumptions, their actual borrowing capacity might sit closer to $580,000. That difference between expectation and reality matters when properties in their target suburbs commonly sell above $800,000.
Income Treatment Varies More Than You'd Expect
Not all income carries the same weight in serviceability calculations. Lenders typically count 100% of salary and wages from permanent employment, but treat other income types with varying levels of acceptance.
Self-employed income requires at least two years of financials, and banks often average your last two years of net profit while ignoring one-off gains. If you earned $95,000 last year but only $68,000 the year before, many lenders will assess you on roughly $81,500. Bonuses and commissions usually need a two-year history as well, and some lenders will only count 80% of the average. Rental income from an investment property you already own typically gets assessed at 75-80% of the actual rent received, accounting for vacancy periods and maintenance costs.
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For buyers working in Wellington's public service sector with stable salaries, this creates a clearer path. Someone earning $110,000 in a permanent government role will have that full amount recognised. But a contractor in the same building on the same effective income may find their borrowing capacity reduced by 20-30% because their income structure doesn't fit the permanency criteria banks prefer.
The Expenses Assumption That Catches Wellington Buyers
Banks don't ask for a detailed breakdown of your actual spending. They apply a standardised living expense figure called the Household Expenditure Measure, which increases with the number of dependents but doesn't adjust for how you actually live.
A single professional renting in Te Aro and spending $2,200 monthly on rent, food, transport and discretionary costs will be assessed against an expense assumption that might sit at $2,800 or higher, regardless of their actual spending patterns. You can't argue that you live on less. The bank's figure stands, and it directly reduces the loan amount they'll approve.
This hits particularly hard for buyers who've been aggressively saving. You might have banked $1,500 every month for three years to build your deposit, proving you can live well below the assumed expenses. That saving discipline doesn't change the calculation. The standardised expense figure still applies, which means the income left over for loan servicing shrinks before you've made a single repayment.
Debt Commitments Reduce Capacity Dollar for Dollar
Every ongoing financial commitment reduces your borrowing capacity, but the impact isn't always proportional to the actual repayment amount. Lenders assess credit cards based on the limit, not the balance. A card with a $15,000 limit costs you borrowing capacity based on roughly 3-4% of that limit as a monthly commitment, even if you pay the balance in full every month and never pay interest.
As an example, a buyer with $25,000 in credit card limits across two cards loses approximately $50,000-60,000 in borrowing capacity, regardless of whether those cards carry any balance. Closing or reducing limits before applying for a home mortgage directly increases what you can borrow. Personal loans, car loans, and Buy Now Pay Later arrangements all count as well, calculated at their actual monthly repayment amount.
For someone targeting a property in Thorndon or Wadestown where sale prices regularly exceed $1 million, a $15,000 limit on a card you rarely use might represent the difference between securing the property or losing it to another buyer with cleaner financials.
How Low Equity Lending Changes the Calculation
Borrowing with less than a 20% deposit triggers Low Equity Premium (LEP), which adds a one-off fee to your loan but also changes how lenders assess serviceability. The higher LVR increases the lender's risk, so some apply stricter servicing criteria or test at an even higher buffer rate.
A buyer with a 10% deposit purchasing an $850,000 home in Newtown needs to borrow $765,000 plus the LEP fee. Some lenders will apply their standard servicing test. Others require a higher income buffer or won't lend above 90% LVR to buyers with certain income types. This narrows your lender options and can reduce the maximum amount available compared to someone borrowing the same sum with a 20% deposit. Understanding your LVR and how it affects both the premium and servicing requirements helps you decide whether to delay your purchase while building a larger deposit or proceed with the options currently available.
Running Your Numbers Before You Start Looking
Most buyers search for properties first and check affordability second. Reversing that sequence changes everything. Knowing your actual borrowing capacity lets you focus on homes within reach and avoid wasting time on properties no lender will support.
Speaking with a mortgage adviser in Wellington before you attend your first open home gives you a clear figure based on how lenders will actually assess your application. That conversation accounts for your income type, existing commitments, deposit size, and the buffer rates currently applied by major banks including ANZ, ASB, BNZ, and Westpac. You'll know whether that $780,000 listing in Karori sits within reach or beyond your serviceability threshold.
If your borrowing capacity comes in lower than expected, you have time to adjust. Paying down debt, closing unused credit facilities, or increasing your deposit all shift the outcome. Making those changes after you've already made an offer doesn't help.
Call one of our team or book an appointment at a time that works for you. We'll run the serviceability assessment upfront so you know exactly what you can borrow before you start your property search.
Frequently Asked Questions
How do lenders calculate how much I can borrow for a home loan?
Lenders use a serviceability assessment that tests whether your income can cover loan repayments at a rate 2-3% higher than the actual rate you'll pay, after subtracting standardised living expenses and existing debt commitments. The amount remaining after these deductions determines your maximum borrowing capacity.
Why does my credit card limit affect my borrowing capacity even if I have no balance?
Lenders assess credit cards based on the limit, not your actual balance or spending. They calculate a monthly commitment of roughly 3-4% of your total limit, which reduces your borrowing capacity by approximately $50,000-60,000 for every $25,000 in card limits.
Does self-employed income reduce how much I can borrow?
Self-employed income typically requires two years of financials, and banks usually average your net profit across those years. This can reduce your assessed income compared to what you actually earned in your most recent year, which lowers your borrowing capacity.
What is Low Equity Premium and how does it affect serviceability?
Low Equity Premium is a one-off fee charged when you borrow with less than 20% deposit. It increases your loan amount and some lenders apply stricter servicing criteria or higher test rates at higher LVR levels, which can reduce the maximum amount they'll approve.
Can I use my actual living expenses instead of the bank's assumption?
No, banks apply a standardised Household Expenditure Measure based on your household size, regardless of your actual spending. You cannot substitute your real expenses even if you consistently live on less than the assumed amount.
