Quick Navigation

I've worked in mortgage broking for over a decade, and every week I see people get confused about how banks decide if they can borrow money. The 28/36 rule is one of those concepts that sounds simple but has a lot of hidden traps. Let me walk you through what it really means in Australia, how lenders tweak it, and what you can do to make sure your application stands a chance.

The Basics of the 28/36 Rule

The 28/36 rule is a guideline lenders use to assess how much debt you can handle. It says:

  • 28% of your gross monthly income should go toward housing expenses (mortgage, taxes, insurance, strata fees).
  • 36% of your gross monthly income should cover all your debts combined (housing + credit cards, car loans, student loans, etc.).

Originally from the US, the rule has been adopted by many Australian lenders, but with local twists. A lot of borrowers I meet assume these numbers are set in stone. They're not. They're more like a starting point for the bank's risk team.

Key insight: In Australia, the '28' part is often replaced with a range of 25–32%, and the '36' can stretch to 40% or more for borrowers with strong credit or large deposits. Don't treat these as hard limits.

How Australian Lenders Apply It

When I apply for a loan on behalf of a client, the first thing the bank does is run a serviceability calculation. They look at your income, expenses, and the proposed loan. The 28/36 rule is one of several filters they use. Here's what's different down under:

Housing Costs Beyond the Mortgage

Most people only think about the monthly repayment, but Australian lenders include:

  • Principal and interest (P&I) repayment (or interest-only if applicable)
  • Council rates
  • Strata or body corporate fees (for apartments and townhouses)
  • Home and contents insurance (estimated)
  • Water rates and sewerage charges

I once had a client who thought they could afford a $1.2 million apartment because the mortgage repayment was $4,200 a month. But once we added $800 in strata, $300 in council rates, and insurance, the total housing cost jumped to $5,500—well over 28% of their $13,000 monthly income. They had to adjust their budget.

Total Debt Picture

The 36% includes not just housing, but also:

  • Credit card limits (not just the balance—many lenders use 3% of the limit as a monthly payment)
  • Car loans, personal loans
  • HECS/HELP student loan repayments (if applicable)
  • Afterpay or Buy Now Pay Later commitments
  • Any other recurring debts

Here's a trap: if you have a credit card with a $10,000 limit but you've never used it, the bank still assumes you could max it out. They'll add $300 (3% of $10,000) to your monthly obligations. That can easily push you over 36%.

How to Calculate Your Own Ratio

Let's walk through an example using realistic numbers. You can follow along with your own figures.

Item Amount (monthly)
Gross income (before tax) $12,000
Mortgage repayment (P&I) $3,500
Council rates $250
Strata fees $400
Insurance $150
Total housing costs $4,300
Housing ratio (4300/12000) 35.8%
Car loan payment $400
Credit card minimum (3% of $5,000 limit) $150
Afterpay usage (estimated) $100
Total debt payments $4,950
Total debt ratio (4950/12000) 41.3%

In this case, the housing ratio is already over 28% (35.8%), and the total debt ratio exceeds 36% (41.3%). Most banks would reject this application unless the borrower has exceptional credit or puts down a larger deposit. And that's the reality: the 28/36 rule is a hurdle, not a guarantee.

How to Improve Your Borrowing Power

If your ratios are too high, you're not doomed. I've helped many clients fix their numbers before applying. Here's what works:

1. Reduce Credit Card Limits

I always tell clients to slash their credit card limits to the absolute minimum they need. If you can live with a $2,000 limit instead of $10,000, do it. The bank will see a much lower monthly obligation (3% of $2,000 = $60 vs $300).

2. Pay Down or Close Afterpay and BNPL Accounts

These are red flags for lenders. They signal that you rely on short-term debt. Pay them off and close the accounts. Your ratio will improve immediately.

3. Increase Your Deposit

A larger deposit means you borrow less, so the housing cost goes down. Plus, if you have at least 20% deposit, you avoid Lenders Mortgage Insurance (LMI), which saves you hundreds monthly.

4. Consider a Longer Loan Term

Stretching the loan from 25 to 30 years reduces your monthly repayment. That can bring your housing ratio back under 28%. Yes, you pay more interest over time, but it's a trade-off some people make to get approved.

5. Add a Co-Borrower

If your partner or a parent comes on the loan, the combined income improves your ratios. Just be careful about the legal implications.

Common Mistakes That Kill Your Application

From my experience, here are the biggest errors I see borrowers make:

  • Ignoring the 'buffer': Australian banks add a serviceability buffer of about 3% above the current interest rate. So if the rate is 6%, they assess you at 9%. That means your real housing cost ratio could be higher than you think. Always calculate using the buffer rate.
  • Not including HECS/HELP repayments: Even though it's not a debt in the traditional sense, the government forces repayment once your income hits a threshold (~$47,000). Lenders include it. If you earn $100k, your compulsory repayment is about $1,000 per month. That's real money.
  • Thinking rental income counts fully: If you're buying an investment property, lenders only count 70–80% of the rental income. They assume there will be vacancies and costs. Don't overestimate your income.
  • Changing jobs right before applying: Lenders want stability. If you switch jobs, they'll want to see probation passed. I've seen applications derailed by a recent career change, even if the new salary is higher.

Frequently Asked Questions

My husband earns $150k and I stay home. Our housing costs are $4k/month, which is 32% of his income. Can we still get a loan?
You might, but don't stop there. Lenders look at total debt picture, not just housing. If you have no other debts and excellent credit, many lenders will stretch to 35% housing ratio. But you'll need a solid deposit (ideally 20%) and proof that your husband's job is stable. My advice: reduce any other debt first, and consider adding a co-borrower if possible.
I have a $15k credit card limit I never use. Should I keep it for emergencies or close it to improve my ratio?
Close it. That $15k limit hurts you more than it helps. The bank assumes you might use it. Instead, keep a small emergency fund in cash. I've seen borrowers go from 42% total debt ratio to 35% just by slashing credit limits. It's the fastest fix.
Does the 28/36 rule apply to investment property loans the same as owner-occupied?
Not exactly. For investment loans, lenders focus on the rental income coverage ratio (often 110% of the loan repayment). But they still use a variation of the 28/36 rule for your personal capacity. The housing cost for your own home is the main concern. Investment property costs are treated as business expenses, but they still add to your total liabilities. I recommend a separate conversation with a broker because the rules differ by lender.
I'm self-employed with variable income. How do banks calculate my 'gross income' for the 28/36 rule?
That's the million-dollar question. Banks typically take an average of your last two years' taxable income (after deductions), add back some deductions (like home office expenses), and possibly apply a 'safe income' haircut. Many self-employed borrowers get surprised by a lower assessable income. To improve your numbers, keep your tax returns clean and have a good accountant. Also, some lenders specialize in self-employed with 'low doc' loans, but expect higher rates.
Is the 28/36 rule the only thing banks check? What about my credit score?
No, it's just one piece. Banks also check your credit score, employment history, loan-to-value ratio (LVR), and living expenses. The 28/36 rule is a quick filter. If you pass that, they go deeper. A bad credit score (below 600) can kill an application even if your ratios are perfect. Conversely, a strong credit score (700+) might persuade a lender to accept higher ratios. Never ignore your credit health.
I found a property that pushes my housing ratio to 30%. Should I still go for it?
If you can afford the repayments comfortably, and you have a buffer (like 3 months' expenses saved), 30% isn't a dealbreaker. Many Australians have ratios in the low 30s. But be careful: interest rates can rise. If the bank's buffer test says 30% at 9% interest, you're fine. But if your actual rate is 6%, your real ratio is lower. My rule of thumb: if the ratio at the current rate is under 30%, you're okay. But if it's over 35% at the current rate, you're too stretched.

This article was fact-checked against current Australian lending practices as of the last update. Individual lender policies may vary. Always speak with a licensed mortgage broker or financial advisor before making decisions.