Practical steps that may strengthen your position before you apply for a home loan
Buying a home, refinancing an existing loan or investing in property often starts with one important question:
how much can I borrow?
Your borrowing capacity is not based on income alone. Lenders may consider your income, living expenses,
existing debts, credit limits, dependants, loan term and other financial commitments when assessing your application.
The amount you may be able to borrow can also vary between lenders because each lender applies its own
credit policy and serviceability assessment.
If your borrowing capacity is lower than expected, there may be practical ways to improve your financial
position before applying.
1. Reduce Unnecessary Credit Card Limits
Lender will consider the total credit limit instead of balance.
For example, you might have a credit card with a $15,000 limit and only owe $500. The lender may still
consider the available credit facility when assessing your overall position.
Before applying for a home loan, review your credit cards and consider whether you still need every account
and whether your current limits remain appropriate.
2. Pay Down Personal Loans and Other Debts
Existing debt can reduce the amount of income available to service a new home loan.
Common commitments include:
- Personal loans
- Car loans
- Credit cards
- Buy now, pay later accounts
- Other home loans
- Investment loans
A smaller debt can still affect borrowing capacity if it has a high required monthly repayment.
Reviewing existing debts before applying can therefore be worthwhile.
3. Review Your Household Spending
Regular living expenses form an important part of a lender’s serviceability assessment.
These expenses may include:
- Groceries
- Utilities
- Insurance
- Transport
- Childcare
- Education
- Entertainment
- Subscriptions
- Private health costs
- Other recurring household expenses
The aim is not to create an unrealistic budget. Review your actual spending and identify expenses you
genuinely no longer need. Reducing recurring costs may improve your monthly cash flow and overall financial position.
4. Make Sure All Eligible Income Is Considered
Your base salary may not be your only source of income.
Depending on the lender and your circumstances, other income may be considered, including:
- Overtime
- Bonuses
- Commissions
- Rental income
- Allowances
- Second-job income
- Self-employed income
- Certain investment income
Lenders may treat these income types differently. Some may accept a larger portion of a particular income
source, while others may require a longer history or additional supporting documents.
This is one reason the same borrower can receive different borrowing capacity results from different lenders.
5. Review Your HELP or Other Study Debt
Study debt can affect serviceability because compulsory repayments may reduce your available income.
If your remaining HELP balance is relatively small, it may be worth asking your mortgage broker how paying
it off could affect your borrowing capacity before making a decision.
The key is to compare the potential borrowing benefit with the impact that using your savings could have
on your deposit and cash reserves.
6. Avoid Taking on New Debt Before Applying
The period before a home loan application may not be the best time to finance a new car, open several credit
accounts or take on significant personal debt.
New commitments can affect your financial position and may reduce your borrowing capacity.
If buying property is your priority, consider discussing any major new credit commitment with your mortgage
broker before proceeding.
7. Check Your Credit Report
Your credit history can influence a lender’s assessment.
Reviewing your credit report before applying can help you identify:
- Incorrect personal information
- Accounts that should already be closed
- Incorrect defaults
- Repayment history issues
- Unfamiliar credit enquiries
It is usually better to identify and investigate a credit issue before lodging a mortgage application.
8. Review Your Loan Structure
Loan structure can affect both current repayments and future flexibility.
Factors to review may include:
- Loan term
- Principal and interest repayments
- Fixed or variable interest rates
- Existing mortgage commitments
- Owner-occupied or investment lending
- Offset account requirements
For example, a longer loan term may lower scheduled repayments, but it can also increase the total interest
paid over the life of the loan.
The aim should be to choose a loan structure that suits your financial position and goals, rather than
simply trying to maximise the amount you can borrow.
9. Compare More Than One Lender
Lenders do not all calculate borrowing capacity in exactly the same way.
Their policies can differ in areas such as:
- Overtime
- Bonuses
- Commission income
- Rental income
- Self-employed income
- Existing debts
- Dependants
- Living expenses
- Employment history
- Loan terms
A borrowing calculator from one lender does not necessarily represent what another lender may assess.
A2Z Finance and Mortgage can compare suitable lending options across its lender panel, helping you understand
which lenders may better suit your circumstances.
10. Assess Your Borrowing Capacity Before You Start Property Hunting
Many buyers begin searching for properties before they fully understand their finance position.
A borrowing capacity assessment can help you understand:
- Your estimated borrowing range
- Your available deposit
- Potential lender options
- Existing debts that may affect capacity
- Possible application issues
- Estimated repayments
- Upfront property purchase costs
- Areas you may be able to improve before applying
Borrowing capacity and affordability are not the same thing. Even if a lender is prepared to approve a
particular amount, you should still consider whether the repayments fit comfortably within your budget,
lifestyle and future plans.
Why Borrowing Capacity Can Differ Between Lenders
A common misconception is that every lender will offer a similar borrowing amount.
In practice, lenders use different credit policies, servicing models and rules for different income types
and financial commitments.
This can be particularly important for:
- Self-employed borrowers
- Property investors
- Contractors
- Applicants receiving regular overtime
- Applicants earning commissions or bonuses
- Borrowers with multiple existing loans
Comparing lenders before submitting an application can help identify options that are better aligned
with your circumstances.
What Is Borrowing Capacity?
Borrowing capacity is an estimate of how much a lender may be prepared to lend based on your financial
circumstances and its lending criteria.
A lender will generally review several areas:
Income: How much you earn, the type of income you receive and how stable that income is.
Expenses: Your household and living costs.
Liabilities: Existing loans, credit cards and other financial commitments.
Dependants: The number of people financially dependent on your income.
Interest rates: The applicable loan rate and the higher assessment rate used for
serviceability testing.
Loan term: The period available to repay the proposed loan.
Credit profile: Your credit history and existing borrowing behaviour.
Frequently Asked Questions
Does reducing my credit card limit increase borrowing capacity?
It may. Credit facilities form part of a lender’s assessment of your financial commitments. Reducing an
unnecessary credit limit can sometimes improve serviceability, although the actual effect depends on the
lender and your circumstances.
Does paying off a car loan help?
Potentially. Removing a monthly car loan repayment can increase the income available to service a home loan.
Before using savings to clear debt, compare the potential serviceability benefit with the effect on your
available deposit.
Does earning more increase borrowing capacity?
Generally, additional acceptable income may improve borrowing capacity. However, lenders can apply different
rules to overtime, commissions, bonuses, rental income and self-employed income.
Can my borrowing capacity be different with another lender?
Yes. Lenders use different assessment methods and credit policies. One lender’s calculation may therefore
differ from another lender’s result.
Will a bigger deposit increase how much I can borrow?
A larger deposit can reduce the amount you need to borrow and may improve your loan-to-value ratio. However,
it does not automatically solve a serviceability issue.
Should I borrow the maximum amount available?
Not necessarily. Your maximum lending capacity and the amount you are comfortable repaying can be very
different. Consider your lifestyle, financial commitments, emergency savings and future plans before deciding
on a loan amount.
Speak With A2Z Finance and Mortgage
If you are planning to buy, refinance or invest, understanding your borrowing capacity before you apply
can help you approach the property market with a clearer budget.
Phone: 0430 121 190 | 0411 680 034
Email: deepak@a2zloans.com.au
Web: www.a2zloans.com.au
