Maximise borrowing capacity
When you apply for a home loan, lenders don't just look at your income. They assess your overall financial picture to determine how much they're willing to lend you. The good news is that borrowing capacity isn't fixed. There are several practical steps you can take before you apply that can meaningfully increase what a lender will offer you.
Reduce Your Credit Card Limits
This is one of the most overlooked and impactful things you can do. Lenders assess your credit cards based on their limit, not your current balance. So even if you pay your card off in full every month, a $15,000 limit is treated as $15,000 of potential debt.
If you have one or more credit cards with limits higher than you actually need, call your bank and request a limit reduction before applying. Better yet, if you have cards you rarely use, consider closing them altogether. This can make a surprisingly large difference to what a lender will offer you.
Pay Down Existing Debts
Every existing debt commitment reduces your borrowing capacity because it eats into the monthly surplus lenders use to calculate serviceability. Personal loans, car loans and buy-now-pay-later accounts (yes, even Afterpay) all count against you. If you're planning to apply for a home loan in the next 6-12 months, prioritise paying down or eliminating these commitments where possible.
Understand How Your HECS Debt Affects You
Many first home buyers are surprised to learn that their HECS/HELP debt affects their borrowing capacity, even if they're not actively making repayments yet.
Lenders factor in your compulsory HECS repayment as a liability when calculating your disposable income. Depending on your salary, this can reduce your borrowing capacity by anywhere from $20,000 to $80,000 or more. It won't prevent you from getting a loan, but it's important to factor in when setting your expectations around how much you can borrow.
Be Mindful of Car Loans and Novated Leases
Car loans are treated similarly to personal loans - the monthly repayment is counted as a committed expense, reducing the income available to service a mortgage. Because they are over such a short term, the repayments are quite high.
Novated leases are slightly more nuanced. While they reduce your taxable income, lenders also factor in the lease repayment as a liability. Talk to your broker about how your specific arrangement will be assessed.
Talk to a Broker Before You Apply
One of the biggest mistakes people make is applying to a lender directly without understanding how they'll be assessed, only to get declined, which then affects their credit file.
A good broker will review your full financial position, identify the things holding your capacity back, and match you with a lender whose policies suit your circumstances. Often there are simple tweaks that, applied in the right order, can make a significant difference to what you're able to borrow.
Ready to find out what you could borrow? Get in touch and we'll run through your numbers together.
