[Video] How to Maximise Your Borrowing Capacity

Maximising your borrowing capacity is key to purchasing the property you want and structuring your finances wisely. Whether you’re buying your first home, upgrading to a new property, or expanding your investment portfolio, understanding how lenders assess your financial situation can make a significant difference.

In this guide, we’ll cover what banks look at and the steps you can take to increase how much you can borrow, while also ensuring that your repayments remain manageable and sustainable.

 

 1. Understand How Your Income Affects Borrowing

Your income is one of the most significant factors lenders consider when determining how much they’re willing to lend.

How Banks Assess Different Types of Income

Not all income is treated equally by lenders:

• Base salary: Typically assessed at 100% of its value.
• Variable income such as bonuses, overtime, and commissions are usually assessed at 80% and must demonstrate consistency over time.

Example: If you earn $10,000 annually in consistent overtime, most banks will only count $8,000 toward your borrowing calculations.

Why Job Stability Matters Before Applying

If you rely on variable income sources, it’s best to maintain job stability before applying for a home loan. Lenders will closely review your income history and may hesitate to count income that appears irregular or uncertain.

2. Reduce Your Liabilities to Free Up Capacity

Existing liabilities directly reduce your borrowing power. Even if you manage these debts responsibly, lenders will factor in the full limits and repayment obligations when calculating your borrowing capacity.

Credit Cards and “Buy Now, Pay Later” Facilities

• Lenders assess your credit card limit, not just your balance.
• Even if you pay off the balance in full each month, a $10,000 limit will still reduce your borrowing power.
• Consider lowering limits or closing unused accounts.
• “Buy Now, Pay Later” services like Afterpay or Zip Pay are also treated as liabilities and can negatively impact borrowing.

Managing or Paying Off HECS/HELP Debt

Recent changes allow some lenders to exclude HECS/HELP debt from calculations if:

• The balance is relatively low (e.g., under $20,000), or
• It can be paid off within two years.

If feasible, paying off your HECS/HELP debt before applying for a mortgage can improve your borrowing capacity.

Debt Consolidation to Lower Repayments

If you have multiple personal loans or credit facilities that you cannot close, consider consolidating them into one loan. Lower total repayments can boost how much you’re eligible to borrow.

3. Optimise Your Existing Loan Structure and Rates

If you already have home loans or investment loans, their structure and rates will affect your borrowing capacity.

Refinancing to Reduce Interest Rates

Lowering your interest rate through refinancing can reduce monthly repayments. This can increase your serviceability, allowing lenders to approve a higher borrowing limit.

Adjusting Loan Terms to Improve Borrowing Power

Extending the term of your loan can reduce your required monthly repayments, which in turn improves your borrowing capacity. This is because lower repayments make it easier for lenders to assess that you can comfortably manage the debt. Principal and interest (P&I) loans typically have higher monthly repayments than interest-only (IO) loans. However, P&I loans usually come with slightly lower interest rates, which can work in your favour when calculating borrowing power.

While interest-only loans have lower repayments during the interest-only period, they can actually reduce your borrowing capacity with many banks. This is because lenders calculate your repayments based on the remaining loan term after the interest-only period ends.

Example: Imagine you have a 30-year loan with five years of interest-only repayments, the bank will assess your repayments as if the full loan amount must be repaid over the remaining 25 years. This results in higher calculated repayments and, ultimately, a lower borrowing capacity.

4. Review and Reduce Your Living Expenses

Your declared living expenses significantly influence how much you can borrow.

Essential vs. Discretionary Spending

Lenders separate expenses into:

• Essential costs: Non-negotiables such as rent, utilities, groceries, and transport.
• Discretionary costs: Items like entertainment, subscriptions, and luxury purchases.

By reducing discretionary spending in the months before applying for a mortgage, you can demonstrate lower living expenses to the lender, increasing your borrowing capacity.

How Living Expenses Impact Lender Calculations

Banks use both your declared expenses and their internal minimum thresholds (called Household Expenditure Measures) to assess affordability. Being thorough and realistic when reviewing your spending can help ensure you’re in a strong position when applying.

5. Choosing the Right Lender and Loan Product

Not all lenders assess borrowing capacity the same way. The right lender, product, and loan structure can significantly impact your results.

Owner-Occupied vs. Investment Loans

Interest rates and policies differ between owner-occupied and investment loans.

• Owner-occupied rates are typically lower.
• Investment loans may allow for negative gearing, affecting your taxable income and borrowing calculations.

Rental Income Policies and Discounts by Lenders

Some lenders apply discounts to rental income, factoring in only a percentage of it, such as:

• 80% of rental income, or
• 95% depending on the property’s postcode and risk profile.

Choosing a lender with favourable policies can directly increase your borrowing power.

Did you know that banks use different assessment rates when calculating borrowing capacity?

Most banks will add a 3% buffer on top of your actual interest rate when assessing a loan. However, some banks only add a 2% buffer, which can result in a higher borrowing capacity for clients.

6. Consider the Ownership Structure for Investment Properties

For property investors, ownership structure plays a crucial role in borrowing calculations and tax implications.

Personal Name vs. Trust Structures

• Purchasing under your personal name can simplify borrowing but may limit flexibility.
• Trust structures can offer asset protection and tax advantages but may complicate lender calculations.

Some banks now allow for certain self-sufficient trusts to be excluded from borrowing calculations, potentially boosting capacity.

Negative Gearing and Borrowing Implications

The percentage of ownership matters when buying property with a partner or other investors, as it impacts negative gearing allocations and tax outcomes.

Important Note: We are not tax advisors. Always seek professional advice from your accountant to ensure you select the right structure for your unique situation.

7. Balance Borrowing Power with Financial Comfort

While maximising how much the bank will lend you is important, it’s equally crucial to consider how much you can comfortably afford to repay.

Taking on too much debt can cause financial stress, especially if interest rates rise or your circumstances change. A responsible borrowing strategy ensures you can achieve your goals without overextending yourself.

Final Thoughts and Next Steps

Boosting your borrowing capacity involves a combination of smart financial planning, strategic loan structuring, and selecting the right lender.

At OneSite Finance, we work closely with homeowners and property investors to:

• Review your current financial situation
• Identify ways to increase your borrowing capacity
• Structure your loans for maximum flexibility and long-term success

Get in touch today to review your loans and explore how we can help you achieve your property goals.