What affects my borrowing capacity?

There are seven factors that affect your borrowing capacity:

  1. Your income and minimum monthly contracted repayments
  2. Your lifestyle/living expenses
  3. Your credit history
  4. Your property deposit
  5. The type, term and interest rate of your home loan
  6. Your assets
  7. The value of your property

Income & commitments:

Before a lender will give you a home loan, they will want to assess how much you can afford in mortgage repayments.

To determine exactly how much you can afford in mortgage repayments, they will look at your income as well as any outstanding debts and other commitments you have. As such, if you are buying a property with another person your repayment capacity may be greater, which would mean greater borrowing power.

In addition to looking at your income, you lender will also review your current commitments, which includes all of your outstanding debt, credit and store card limits, personal loans, car finance and any other ongoing financial commitments you may have.

It may sound extreme but lenders will look at the credit limit on your card or cards as a liability you may have in the future, even if you don’t owe a solitary cent currently.

For instance, if you have a card with an $8000 limit and another with a $4000 limit, a lender will write down $12,000 as a debt against your name. Reducing your credit card limit by $10,000 may increase your calculated monthly disposable income by $300, which has the effect of having a net pay rise of $3600 per year.

Lifestyle/living expenses:

When working out your borrowing capacity, a lender will also look at your living expenses – things like what you spend on groceries, utility bills, school fees, child care fees etc all have to be taken into account.

Once a lender has identified how much you can borrow, it is a good idea to work out what your living expenses are and make sure you can meet your mortgage repayments while still retaining a good standard of living

Credit history:

Your credit history will play a big role in determining what your borrowing capacity is. If you can prove you are a reliable customer who meets their financial obligations on time, you may be able to borrow a higher amount. Of course, if you have missed a few bills or credit card payments in the past, this may work against you when you are trying to obtain finance.

Before seeing a lender, it is a good idea to get a copy of your credit history and see if there are any red flags or problems you can address before you start looking for finance.

Property deposit:

The more money you have in savings and can thus contribute to your property deposit, the easier it will be to obtain finance and increase your borrowing capacity. Lenders like to see that you are able to save money over a period of time – otherwise referred to as “genuine savings”, usually in the form of 5% of the proposed purchase price held in your savings account for at least 3 months,

Home loan type, term and interest rate:

The amount you can borrow may also depend on the interest rate and the term of your home loan. The lower the interest rate, the lower your repayments will be. A longer-term home loan will mean lower repayments, but a shorter-term loan may save you interest. You need to think carefully about what is most important to you.


Your lender will want to know what you have in the way of assets before they determine how much you can borrow. Having assets like a vehicle, an investment property or shares can significantly influence a lender’s decision, especially those who credit score.

Value of the property:

Finally, once you have found the property you would like to purchase, how much a lender will lend to you will depend on what the property is worth, most borrowers don’t know this.

The lender will find out how much a property is worth by conducting a valuation of the property. That valuation will then determine exactly how much they can and will lend to you.

Effective strategies to boost your borrowing capacity

Keep financial records up to date

One of the most common reasons borrowers find themselves well short of their anticipated borrowing levels is that they don’t have up to date financial information to prove their income levels to the lender.

Simply completing your tax returns on time can help us secure the loan you’re after. It’s also important to show your overall income to your lender, not just your last two payslips.

In many cases, the last two payslips required by a lender may not give a clear picture of your true income. In the situation where you may have a low base salary but high bonus payments, providing your last two payslips could be a disadvantage. Most lenders will be able to provide an alternative way to assess your income which can be based on the group certificate from your employer or even notice of assessment from the Australian Tax Office.

Concentrating on the bigger picture of annual income rather than the most recent payslips will help.

Select the right loan product

Even within one financial institution there can be a big difference in borrowing capacity levels based on the product you select. Product features such as interest only repayments, fixed rates, variable rate discounts and lines of credit can all impact how much the lender will offer.

Be aware that income type is treated differently by nearly every lender

Lenders can be very selective when it comes to the type of income they include in their repayment capacity calculations. Some income types may be excluded altogether by one lender and fully included by another.

Almost every lender treats income derived from dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents differently. Navigating your way around this maze is very difficult and every dollar that a lender accepts improves your borrowing capacity.

Shop around

It may sound obvious but paying a low interest rate will save you hundreds of dollars on annual loan repayment commitments and thus increase your initial affordability.

A decrease of one per cent on your home loan rate may free up your cash flow by $260 a month on a $400,000 loan. This has the same effect of getting a net pay rise of $3,120 per year.

Allow us to shop around for you.

Split your liabilities with your partner

If you’re planning to buy a property under your name only, you can split your expenses on paper with your partner.

For example, two children as dependants may not be counted as your dependants if you can prove that your partner does and will continue to provide for them financially.

Use your properties as cross collateral

Using your property as cross collateral, or cross security, means you provide an existing property as a security to buy another property.

It’s increasingly requested by lenders because it minimises their risk of lending money against one single property. In other words, it’s a form of diversification for a lender. But be warned, there are pros and cons with this strategy.

The good thing is it may increase your serviceability to the extent you may borrow at a higher loan-to-value ratio. This may also save you money on lenders mortgage insurance when you borrow above the lender’s threshold.

The bad thing is, in the event of you being unable to meet the loan repayments, the lender may repossess the securities, which could put your properties at risk.

Another disadvantage with this option is that it can restrict your ability to refinance with another lender, so make sure you understand all the implications.

Extend the term of your loan

The longer the loan, the less the monthly repayments.

Thirty year loans for property are considered normal. You may want consider refinancing your current mortgage to a better product and interest rate and at the same time set it up for a 30 year term.

Save, save, save

Build up as much deposit or equity as possible. If you’re using a deposit to secure your loan, be sure to have saved consecutively over at least three to six months, depending on the lender.

Mind you, there is a large range with borrowing capacity between lenders. Go to our borrowing capacity calculator to get a rough idea on how much you can borrow.

Get an accurate borrowing capacity by contacting us.

About the author

Matt Carra

Matt Carra

Matt Carra is the Owner of Blue Key Finance, a Finance Broker since 2004, an SMSF Lending Specialist, a Property Investment Educator, and a Mentor to new Finance Brokers entering the finance industry. Matt is passionate about providing valuable guidance and honest advice, educating Australians on how to buy their first homes and invest successfully while protecting them with knowledge. Matt has strong long-term relationships with his panel of lenders and extensive knowledge on their credit policies, and utilises that skillset to give you peace of mind by recommending you to the right lender the first time, to negotiate a better deal, and to fight for your cause – that’s Matt’s commitment to you. Contact Matt today to start the conversation on 0425 726 538 or email matt.carra@bluekeyfinance.com.au