A businesswoman charts a course to increasing her borrowing capacity

With the current upswing in interest rates, it’s important for buyers to know how they can boost their borrowing capacity without stretching their budgets.

Whether you’re looking to buy your first home or upgrade to larger digs, you need to get your financial health in order before you even begin flicking through listings online or in your local newspaper. Your finances can determine exactly how much you can borrow for your new home. Here are some ways you can maximise your borrowing power without straining your daily budget.

Look over your credit limits

When applying for a home loan, having multiple credit cards might put you at a disadvantage. If you own three credit cards with a limit of $15,000 each, the lender could consider a potential loan of $45,000 on your hands, significantly reducing your borrowing capacity.

While this may not seem fair, most lenders prefer to err on the side of caution, as it is only human to dip into the amount that is so easily available to you.

Giving up that extra credit card will save you the annual maintenance fee as well as help you avoid high-interest credit that can burn a hole in your pocket.

Also read: how your credit cards could impact your home loan

Polish your credit rating

Another easy and effective way to increase your borrowing capacity is to maintain a clean credit history. Paying all your utility bills on time (even the most inconspicuous ones) makes you a responsible borrower in the eyes of a potential lender and can increase your chances of approval as well as your borrowing capacity.

It is a good idea to pull out your credit file from providers to know and resolve any issues you might have on your record.

Pay off your existing debts or consolidate them into a single loan

Having lots of debts on your file can have the lenders raising their eyebrows. Why not roll up all the smaller debts under a single loan? It would even streamline your payments and help you budget better.

Consolidating debts into a single loan will also make it convenient for you to pay them off. Refinancing at a better rate by bringing all your loans under the refinanced loan can save you a lot of bucks over the life of the loan.

However, you should be careful about loan consolidation and ask your trusted broker how much you can really save.

Check your expenses

It is important to calculate your living expenses clearly before you file a loan application, as lenders will take this into account for determining the amount they will lend you. School fees for your children, any repayments for an investment property (many lenders assume the worst-case scenario that the property may remain vacant for some time), and the expensive club membership are all considered when determining your repayment capacity and consequently, your borrowing capacity.

It is also a good idea to check your borrowing capacity based on existing expenses and start your property search accordingly.

You can try to calculate how your expenses will impact your capacity using our Borrowing Power calculator.

Keep your financial records

Keep your financial records up-to-date and don’t just rely on your previous month’s salary slip. Supplementing your application with proof of any bonuses or overtime you regularly receive, rental and other income from investments can significantly affect the assessment of your financial position by a prospective lender.

Presenting an application with organised and complete paperwork saves a lot of time and unnecessary going back-and-forth with the bank as well.

Consider the type of loan

The type of loan you have applied for can have an impact on the amount you can borrow. Lenders always calculate your repayment capacity at an interest rate that is approximately 3% higher than the rate at which the loan is being offered. However, when you go for a fixed-rate loan, the repayment capacity for that period is usually calculated without any buffer.

Also, if you apply for a loan jointly with your partner, more often than not, you can borrow more than what you would have as a sole applicant.

To help you find the best loans available in the market, you can go to our list of best home loans page.

Beef up your savings and deposit

Most lenders require a record of genuine savings over a period of at least three months before they approve your loan. Further, having a good amount as a deposit means you pay lesser Lenders Mortgage Insurance (LMI) or none at all if you have saved a 20% deposit.

Taking advantage of the First Home Owners Grant offered by state and territory governments can further boost your savings as it will supplement the amount you pay upfront for the house. Additional stamp duty concessions are available for first home-buyers that can save up some cash to supplement your deposit amount.

What are the factors that could impact your borrowing power?

While it’s impossible to be 100% certain what each lender looks for, there are some key considerations most lenders will look into when assessing your ability to meet your repayments and whether or not to grant you a home loan.

Here are seven factors that can impact your borrowing power.

1. Your combined income and financial commitments

Before a lender will grant you a home loan, they will consider your income stream, your ability to repay the loan, and your employment security. Self-employed people may have a harder time showing that they are financially secure, while people who’ve held jobs for a solid period of time will be looked upon more favourably.

Your financial commitments such as existing debts, car loans, and lines of credit will also be taken into consideration. The rule of thumb is that the lower your financial commitments, the more money the lender may be willing to lend you.

If you’re buying a property with another person, your repayment capacity may be greater, which in turn could increase your borrowing power.

2. Your living expenses

When working out your borrowing capacity, lenders will also consider your living expenses. Lenders look into these areas because they want to ascertain if you can truly afford the repayments while still maintaining the lifestyle you’ve become accustomed to.

Many people apply for exorbitant home loans and plan to make adjustments to their lifestyles to meet the new financial commitment. This is one of the reasons why many people end up defaulting on their home loans, as they inevitably revert to the lifestyle they’re used to.

To avoid problems down the road, it’s important to work out your living expenses and the cost of maintaining your lifestyle. Once you have these figures, you’ll be able to work out a mortgage repayment scheme that won’t adversely affect your standard of living.

3. The size of your deposit

The more money you have put aside for your property deposit, the easier it will generally be to obtain finance and increase your borrowing capacity.

Lenders also want to see that you’re able to save a sizeable amount of money over a period of time (this is otherwise referred to as “genuine savings”).

4. Your credit history

Your credit history is a vital part of your home loan application process. The lender will check to ensure that there is no record of you defaulting on previous loans, credit cards, or other lines of credit. 

If you can prove that you’re a reliable borrower who meets their financial obligations on time, you may be able to borrow a higher amount. Of course, if there are any defaults or late payments mentioned in your credit history, this may work against you when you’re trying to obtain a home loan.  Your credit history is a vital part of your home loan application process. The lender will check to ensure that there is no record of you defaulting on previous loans, credit cards, or other lines of credit. 

5. Your assets

Your lender will also want to look at any existing assets you may have, such as a car, share portfolio, properties, or any other tangible assets that can be used by them should you not be able to meet your repayments.

When applying for a home loan, be sure to list as many assets as you can. Include the assets’ insured value, and list down any investments and savings.

6. Home loan type, term, and interest rate

The amount you can borrow may also depend on the interest rate and term of your home loan. The lower the interest rate, the lower your repayments may be. A loan with a longer term will mean lower repayments but more paid in interest over the life of the loan, whereas a loan with a shorter term may save you on interest but means your repayments will be bigger.

Generally, the longer the term period, the less financial stress you’ll face in trying to meet your repayments. For example, your repayments may be easier to manage over a 30-year period than they would be over a 25-year period, even though the interest rate for the former will be more.

Use our mortgage repayment calculator to have an idea of what your home loan expenses would be.

7. Value of the property

How much a lender will lend to you can also depend on how much the property is worth. To find out, the lender will conduct a valuation of the property to ensure that it isn’t overvalued or undervalued.

Valuing the property will also help the lender determine if the property will provide a return to them should the worst-case scenario occur and they have to repossess your home.