Your borrowing power determines the maximum amount a lender will allow you to borrow for a home loan. In competitive Australian property markets, having greater borrowing capacity can mean the difference between securing your dream home and settling for a compromise. If you have been told you cannot borrow enough, there are concrete steps you can take to improve your position.
Understanding How Lenders Assess Borrowing Power
Before working on improvements, it helps to understand what lenders consider when calculating your borrowing capacity. The primary factors are your income, your existing financial commitments, your living expenses, and your credit history. Lenders want to ensure you can comfortably afford repayments, typically assessing your ability to pay at an interest rate several percentage points higher than the actual rate.
Use our borrowing power calculator to estimate your current position based on these factors. This gives you a baseline to work from as you implement improvement strategies.
Reduce Your Existing Debts
Existing debts directly reduce your borrowing capacity. Personal loans, car loans, HECS-HELP debts, and buy-now-pay-later accounts all count against you. Lenders calculate the required repayments on these debts and deduct them from your available income for mortgage servicing.
Where possible, pay off smaller debts before applying for a mortgage. Even a five thousand dollar personal loan requiring one hundred and fifty dollars per month in repayments could reduce your borrowing power by twenty thousand dollars or more.
Lower Your Credit Card Limits
This is one of the most impactful changes you can make. Lenders assess credit cards not based on your current balance but on your total credit limit. They assume you could potentially max out your card at any time and calculate the repayment required on the full limit.
A credit card with a twenty thousand dollar limit might reduce your borrowing power by forty to sixty thousand dollars, even if you only use a fraction of it. Contact your card issuer to reduce your limit to the minimum you need, or close cards you do not use. Be aware that reducing limits or closing accounts should ideally be done several months before applying for a mortgage to allow time for credit bureau updates.
Increase Your Income
Higher income directly translates to greater borrowing power. Consider asking for a pay rise, seeking a higher-paying position, or taking on additional work. If you have been with your employer for some time and your performance warrants it, a salary increase not only improves your borrowing capacity but also your ongoing ability to manage repayments.
If you have a partner or spouse who is not currently working or works part-time, increasing their income through employment can significantly boost your combined borrowing power. Joint applications benefit from combined incomes, which can nearly double your capacity compared to a single-income application.
Reduce Your Living Expenses
Lenders examine your bank statements to assess your actual living expenses. High discretionary spending, frequent dining out, subscription services, and gambling transactions can all raise red flags and reduce your assessed capacity.
In the three to six months before applying for a mortgage, tighten your spending. Cancel unnecessary subscriptions, reduce takeaway meals, and demonstrate responsible financial behaviour. Your bank statements become evidence of your ability to manage money and live within your means.
Save a Larger Deposit
While a larger deposit does not directly increase your borrowing capacity, it reduces the amount you need to borrow. If you can save an additional fifty thousand dollars for your deposit, you can potentially afford a property worth fifty thousand dollars more without increasing your required loan amount.
A larger deposit also eliminates or reduces Lenders Mortgage Insurance, freeing up funds that would otherwise be absorbed by LMI premiums. Check our LMI calculator to see how different deposit sizes affect this cost.
Choose the Right Loan Structure
Different lenders and loan types assess borrowing capacity differently. Some lenders are more generous with certain income types, such as overtime, bonuses, or rental income. Others have more favourable expense calculations. A mortgage broker can help you find lenders whose assessment criteria work in your favour.
Choosing a longer loan term, such as thirty years instead of twenty-five, reduces the required monthly repayment and can increase your borrowing capacity. While this means paying more interest over the loan's life, it might enable you to purchase now rather than waiting years to save more or earn more.
Consider a Guarantor Loan
If a family member owns property with sufficient equity, they may be able to act as a guarantor on your loan. Guarantor loans allow you to borrow more than you would qualify for independently, using the guarantor's property as additional security.
This arrangement carries significant responsibility for the guarantor, who could lose their property if you default. It should be approached carefully with full understanding from all parties. However, for borrowers with good income but limited deposit or borrowing history, guarantor arrangements can be a pathway to property ownership.
Improve Your Credit Score
A poor credit score can limit your borrowing options and capacity. Check your credit report for errors and address any defaults or missed payments. Pay all bills on time, reduce credit card utilisation, and avoid making multiple credit applications in a short period.
Improving your credit score takes time, but a better score opens access to more lenders with better rates and higher borrowing limits. You can obtain a free copy of your credit report from the major credit bureaus in Australia.
Timing Your Application
Apply for your mortgage when your financial position is at its strongest. If you are expecting a pay rise, bonus, or other income boost, wait until this is reflected in your records. If you have recently paid off a debt, ensure this is updated with credit bureaus. Timing your application strategically can maximise your assessed borrowing power.
Start by assessing your current borrowing capacity with our calculator, then implement relevant strategies from this guide. With focused effort, you can significantly increase the amount lenders will offer you and improve your chances of securing the home you want.