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💰 Borrowing Capacity Guide - New Zealand

Understanding borrowing capacity is crucial before house hunting. Banks assess your income, expenses, existing debts, and stress-test your ability to service a loan at higher interest rates. This guide explains exactly how banks calculate what you can borrow, what factors matter most, and strategies to maximize your borrowing power while staying financially secure.

Key Point: Banks use multiple assessment methods to determine borrowing capacity. Your gross income matters, but so do expenses, existing debts, dependents, and stress testing at rates 2-2.5% above current market rates. The Debt-to-Income (DTI) ratio guideline is 6x annual household income maximum. A household earning $100,000 can typically borrow $500,000-$600,000 depending on expenses and debts. Banks reduce borrowing by roughly $5 for every $1 of monthly debt repayments. Understanding these formulas helps you plan better and improve your borrowing position before applying.

How Banks Calculate Borrowing Capacity

Banks use sophisticated servicing calculators that consider multiple factors:

1. Income Assessment:

Income Type How Assessed Notes
PAYE salary 100% of gross income Most reliable, fully counted
Bonuses/commissions 50-100% average over 2 years Must be consistent
Self-employed Average net profit last 2 years Requires tax returns
Rental income 70-80% of gross rent Accounts for vacancies/costs
Overtime 50-80% if regular Must prove consistent
Benefits (DPB/etc) Varies by bank Some banks don't count

2. Expense Assessment:

Banks use the higher of:

Your declared actual expenses, OR
Their benchmark expenses based on household size
Household Size Monthly Benchmark Annual
1 adult $1,800-$2,200 $21,600-$26,400
2 adults $2,800-$3,500 $33,600-$42,000
2 adults + 1 child $3,500-$4,200 $42,000-$50,400
2 adults + 2 children $4,200-$5,000 $50,400-$60,000
2 adults + 3+ children $5,000-$6,000 $60,000-$72,000

3. Existing Debts:

Banks deduct all debt obligations:

  • Car loans: Full monthly repayment deducted
  • Personal loans: Full monthly repayment deducted
  • Student loans: 12% of gross income deducted (NZ repayment rate)
  • Credit cards: 3-5% of limit deducted monthly (even if $0 balance)
  • Afterpay/ZIP: Counted as available credit, reduces capacity
  • BNPL services: Increasingly scrutinized by banks
⚠️ Credit Card Impact

$20,000 credit card limit reduces borrowing by $60,000-$100,000 even with $0 balance! Banks assume you could max it out anytime. Cancel unused cards before applying.

4. Stress Testing:

Banks test affordability at higher interest rates:

Current market rate: 6.5%
Bank stress test rate: 8.5-9.0%
Must afford repayments at stress rate
This limits borrowing capacity significantly

Debt-to-Income (DTI) Ratio

Reserve Bank guidance limits total lending:

DTI = Total Debt ÷ Gross Annual Income
Guideline: Max 6x annual income
Some banks use 5x for conservative lending
Investors face stricter limits (4-5x)

DTI Examples:

Annual Income Max Debt (6x) Max Debt (5x)
$60,000 $360,000 $300,000
$80,000 $480,000 $400,000
$100,000 $600,000 $500,000
$120,000 $720,000 $600,000
$150,000 $900,000 $750,000

The Servicing Calculation

Banks calculate maximum borrowing using this approach:

Step 1: Calculate net disposable income
Gross income - Tax - Living expenses - Existing debts = Available
Step 2: Apply stress test rate (8.5-9%)
Calculate max loan at stress rate with available income
Step 3: Check DTI limit
Ensure total debt doesn't exceed 6x income
Step 4: Take lower of servicing or DTI result

Factors That Reduce Borrowing Capacity

Factor Impact Example
Credit cards Huge reduction $10K limit = -$30K-$50K borrowing
Car loan $5 less borrowing per $1 repayment $500/month = -$150K borrowing
Student loan 12% of income unavailable $80K income = -$9,600/year
Dependents Higher expense benchmarks Each child = -$700/month expenses
Self-employed Lower income recognition Must prove 2-year average
Probation period May need to wait Some banks want 3-6 months passed

Strategies to Maximize Borrowing Capacity

Before Applying:

  • Cancel unused credit cards: Each $10K limit reduces borrowing $30-50K
  • Pay off small debts: Clear car loans, personal loans if possible
  • Reduce credit limits: Lower limits on cards you keep
  • Make voluntary student loan payments: Lower balance = lower ongoing deduction
  • Build savings buffer: Shows financial discipline
  • Tidy credit history: No missed payments 6 months before applying
  • Avoid job changes: 3+ months in role preferred, 6+ better

Income Optimization:

  • Include all income sources: Bonuses, overtime, rental, dividends
  • Self-employed: Ensure last 2 tax returns show strong profit
  • Add partner income: Joint application increases capacity
  • Prove consistency: Provide payslips showing regular income

Expense Management:

  • Review actual spending: Reduce discretionary expenses 3 months before applying
  • Bank statements matter: Banks review last 3-6 months
  • Avoid gambling: Red flag for banks
  • Minimize Uber Eats/takeaways: Shows poor money management
  • No overdrafts: Sign of financial stress
💡 Borrowing Capacity Reality Check

Just because you CAN borrow an amount doesn't mean you SHOULD.
Leave 15-20% buffer below maximum borrowing for:
• Interest rate increases
• Unexpected expenses
• Job changes or income drops
• Life changes (kids, health)

Better to buy below budget than max out and face financial stress.

Bank Comparison

Different banks have different appetites:

Factor Conservative Banks Moderate Banks Aggressive Banks
DTI limit 5x income 6x income Up to 7x in rare cases
Stress test rate 9.0% 8.5-8.75% 8.5%
Self-employed Strict, 2-year proof 1-2 years May accept 1 year
Rental income 70% counted 75% counted 80% counted

Tip: Use a mortgage broker to find which bank will lend you most. Don't just apply to your current bank.

🔢 Borrowing Capacity Calculations

Example 1: Single Person - Standard Employment

Profile: Sarah, 28, Auckland

  • Gross income: $85,000/year ($7,083/month)
  • After-tax income: $63,400/year ($5,283/month)
  • Living expenses: $2,200/month (bank benchmark single person)
  • Student loan: Yes (12% repayment = $10,200/year = $850/month)
  • Credit card: $8,000 limit (unused)
  • No other debts

Servicing Calculation:

After-tax income: $5,283/month
Less student loan: -$850/month
Less living expenses: -$2,200/month
Less credit card buffer (3% of $8K): -$240/month
Available for mortgage: $1,993/month

Borrowing at Stress Test Rate (8.5%):

Monthly available: $1,993
At 8.5% over 30 years
Maximum loan: $259,000

DTI Check:

Income: $85,000
6x DTI limit: $510,000
DTI not limiting (servicing is limiting factor)

Improvements:

Cancel credit card: +$72,000 borrowing
Pay off $20K student loan: +$25,000 borrowing
Potential total: $356,000

Example 2: Couple - One Income, Debts

Profile: Mike & Emma, 32 & 30, Wellington

  • Mike income: $95,000/year
  • Emma income: $0 (stay-at-home parent)
  • Combined after-tax: $70,300/year ($5,858/month)
  • Living expenses: $3,800/month (couple + 1 child benchmark)
  • Car loan: $450/month ($18,000 remaining)
  • Credit cards: Mike $12,000 limit, Emma $5,000 limit
  • No student loans

Servicing Calculation:

After-tax income: $5,858/month
Less living expenses: -$3,800/month
Less car loan: -$450/month
Less credit cards (3% of $17K): -$510/month
Available for mortgage: $1,098/month

Borrowing at 8.5%:

Monthly available: $1,098
Maximum loan: $143,000

After Improvements:

Pay off car loan: +$138,000
Cancel credit cards: +$153,000
New borrowing: $434,000
With $80K deposit → $514K property

Example 3: Dual Income Couple - No Debts

Profile: James & Lisa, 35 & 33, Christchurch

  • James: $78,000/year
  • Lisa: $72,000/year
  • Combined: $150,000/year
  • After-tax: $111,000/year ($9,250/month)
  • Living expenses: $4,500/month (2 adults, 2 children)
  • No debts, no credit cards, no student loans

Servicing Calculation:

After-tax income: $9,250/month
Less living expenses: -$4,500/month
Available for mortgage: $4,750/month

Borrowing at 8.5%:

Monthly available: $4,750
Maximum loan: $618,000

DTI Check:

Income: $150,000
6x DTI limit: $900,000
Not limiting (can borrow $618K)

Result: Clean financial position = strong borrowing capacity. With $120K deposit, can purchase $738K property.

Example 4: Self-Employed Impact

Profile: David, 40, Auckland

  • Business gross revenue: $180,000/year
  • Net profit (last 2 years average): $85,000/year
  • Banks assess on net profit, not revenue

Income Assessment:

Year 1 net profit: $78,000
Year 2 net profit: $92,000
Average: $85,000 (bank uses this)
After-tax: $63,400/year ($5,283/month)

Compared to PAYE:

Scenario Assessed Income Max Borrowing
Self-employed $85,000 ~$425,000
If PAYE employee $180,000 ~$900,000

Impact: Self-employed status reduces borrowing by 50%+ even with same revenue!

Example 5: Credit Card Impact Analysis

Testing credit card limit impact:

Credit Card Limit Monthly Buffer (3%) Borrowing Reduction
$5,000 $150 -$46,000
$10,000 $300 -$92,000
$15,000 $450 -$138,000
$20,000 $600 -$184,000
$30,000 $900 -$276,000

Calculation basis: At 8.5% over 30 years, each $100/month repayment capacity = ~$30,667 borrowing.

⚠️ Multiple Cards Compound

3 cards with $10K limits each = -$276K borrowing power! Cancel unused cards immediately before applying for mortgage.

🌍 Real-World Borrowing Capacity Stories

1
Credit Card Wake-Up Call

Rachel, 29, teacher in Auckland, $72K income

First Application:

Expected to borrow: $450,000
Bank approved: $280,000
Shocked by huge difference!

The Problem:

  • Credit card 1: $12,000 limit (balance $800)
  • Credit card 2: $8,000 limit (balance $0)
  • Credit card 3: $15,000 limit (rewards card, unused)
  • Total limits: $35,000
  • Bank deducted $1,050/month (3% of limits)

The Fix:

Cancelled cards 2 and 3 completely
Reduced card 1 limit to $3,000
Total limits: $3,000 (down from $35,000)
Monthly deduction: $90 (down from $1,050)

Result:

  • Reapplied 3 months later
  • Approved for $438,000
  • Increase of $158,000!
  • Successfully purchased $530K apartment

Lesson: Unused credit cards are silent borrowing killers.

2
The Car Loan Trap

Tom & Sarah, combined $130K income, wanted $600K loan

Their Situation:

  • Car loan: $650/month ($32,000 remaining, 4 years left)
  • Bank approved: $415,000
  • $185,000 short of goal!

The Math:

Car loan: $650/month
Borrowing reduction: $650 × 30 × 12 = $234,000
Car was costing them $234K in borrowing power!

Their Decision:

  • Used $32K from savings to pay off car loan
  • Reduced house deposit from $150K to $118K
  • Reapplied immediately
  • Approved for $618,000
  • Purchased $736K home (vs $533K before)

Analysis:

Spent $32K to unlock $203K more borrowing. Even with lower deposit (16% vs 20%), better outcome than keeping car loan.

3
Self-Employed Reality Check

Jason, 38, tradesman contractor

His Income:

Gross business revenue: $165,000/year
After expenses net profit:
Year 1: $68,000
Year 2: $74,000
Average: $71,000 (bank assessment)

The Problem:

  • Had been claiming maximum business expenses
  • Minimized tax (smart for tax, bad for borrowing)
  • Bank only saw $71K income, not $165K revenue
  • Approved for $380,000
  • Needed $550,000

Strategic Fix (for next year):

  • Reduced aggressive expense claims
  • Paid more tax but showed higher profit
  • Year 3: Net profit $95,000
  • New 2-year average: $84,500
  • Reapplied, approved for $520,000

Lesson: Self-employed need to balance tax minimization vs borrowing power. Plan 2 years ahead.

4
The Perfect Storm Success

Mark & Jenny, both 34, combined $145K income

6 Months Before Applying:

  • Cancelled 4 unused credit cards ($43K limits)
  • Paid off Mark's $16K car loan
  • Made $8K voluntary student loan payment (Jenny)
  • Reduced spending, built 3-month emergency fund
  • Mark's employer confirmed in writing (off probation)

Application Time:

Clean bank statements (no gambling, minimal takeaways)
Strong savings pattern shown
Zero unnecessary debts
Both stable employment 2+ years

Results:

  • Applied to 3 banks via mortgage broker
  • Bank A offered: $710,000 (conservative)
  • Bank B offered: $785,000 (moderate)
  • Bank C offered: $820,000 (aggressive)
  • Chose Bank B ($785K) as comfortable middle ground
  • Purchased $850K home with $65K deposit (down payment assistance)

Lesson: Preparation matters. 6 months of financial discipline unlocked $200K+ extra borrowing.

🎯 Test Your Knowledge

Quiz on Borrowing Capacity in NZ

1. Maximum DTI (Debt-to-Income) guideline in NZ:
3x annual income
6x annual income
8x annual income
10x annual income
2. Banks stress-test mortgage applications at:
Current market rate
2-2.5% above current rate
5% above current rate
10% fixed rate
3. $20K credit card limit reduces borrowing by approximately:
$20,000
$40,000
$180,000-$200,000
No impact if balance is $0
4. Student loan impact on borrowing:
No impact on borrowing
12% of gross income deducted
Full balance deducted
Only impacts if balance over $50K
5. Self-employed income assessed on:
Gross business revenue
Average net profit last 2 years
Projected future earnings
Gross revenue minus 30%
6. Rental income counted at:
100% of gross rent
70-80% of gross rent
50% of gross rent
After all expenses only
7. Bank living expense benchmark for 2 adults + 2 children:
$2,000-$2,500/month
$3,000-$3,500/month
$4,200-$5,000/month
$6,000-$7,000/month
8. $100K annual income, max borrowing at 6x DTI:
$400,000
$500,000
$600,000
$800,000
9. Banks assess credit card impact at:
Current balance only
3-5% of total limit monthly
10% of total limit monthly
No impact if paid in full
10. $500/month car loan reduces borrowing by approximately:
$6,000 (annual total)
$50,000
$150,000-$180,000
$300,000
11. Best time to cancel credit cards:
After mortgage approved
During application process
3-6 months before applying
Doesn't matter when
12. PAYE salary income counted at:
80% of gross
100% of gross
Net after-tax only
Average last 2 years
13. Overtime income typically counted at:
100% if regular
50-80% if proven consistent
Not counted at all
Only if guaranteed
14. Probation period impact on borrowing:
No impact at all
Can't borrow until completed
Some banks require 3-6 months passed
Reduces borrowing by 50%
15. Bank reviews how many months of statements:
1 month
3-6 months
12 months
24 months
16. Gambling on bank statements:
No impact if small amounts
Red flag, can reduce or decline application
Only impacts if losses exceed $10K
Banks don't check for this
17. If stress tested at 8.5%, current rate likely around:
8.5%
7.0%
6.0-6.5%
4.5%
18. Multiple applicants (couple) vs single:
Same borrowing capacity
Higher capacity (combined income, shared expenses)
Lower capacity (higher expenses)
Only first income counts
19. Buy Now Pay Later (BNPL) services like Afterpay:
Don't impact borrowing
Counted as available credit, reduces capacity
Only if currently in debt
Banks can't see these
20. Best strategy to maximize borrowing:
Keep all credit cards for emergencies
Minimize declared income to reduce tax
Cancel unused credit, pay off debts, show clean statements
Apply to multiple banks simultaneously
21. Bonus/commission income counted at:
100% of last year
50-100% average over 2 years if consistent
Not counted at all
Only guaranteed portion
22. Mortgage broker vs applying directly:
Direct application always better
Broker can find bank with best capacity for your situation
Brokers reduce borrowing amount
No difference in capacity
23. Financial dependents (children) impact:
No impact on borrowing
Higher expense benchmarks, reduces capacity
Only impacts single parents
Government support offsets cost
24. Paying off $20K car loan vs keeping as deposit:
Always keep as deposit
Often better to pay loan (unlocks $150K+ borrowing)
Makes no difference
Never pay off, keep liquidity
25. Most important factor in borrowing capacity:
Current property market value
Deposit amount
Net disposable income after all expenses and debts
Credit score only

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