Buying your first home or investment? One of the biggest things to understand is your borrowing capacity.
This is how much a bank or lender is willing to let you borrow. It determines the homes and suburbs you can consider, and how quickly you can move when you find the right property.
The good news is, there are ways to improve your borrowing capacity, even if you’re just starting out. A few small changes and the right advice can make a big difference.
Different paths, different plans
Borrowing money looks different depending on what you’re trying to do.
If you’re buying a place to live in, you might be focused on comfort, location, and lifestyle. Maybe you want space to grow into, a quiet street, or something close to work and family.
If you’re investing, your focus is more on the numbers. You’ll be thinking about rental income, long-term growth, and building wealth.
Lenders treat these goals differently. Knowing how to prepare based on your plan can help you borrow more and borrow smarter.
1. What lenders look at
Lenders want to be sure you can repay the loan without getting into financial stress.
They look at:
- Your income: What you earn from work or other sources.
- Your expenses: How much you spend each month, including food, transport, childcare, and entertainment.
- Your debts: Any money you already owe, like credit cards, car loans, personal loans, or HECS.
- Your savings: A good deposit and saving history can help you look more reliable.
- Your credit score: Lenders check if you’ve paid your bills and debts on time.
If you’re buying an investment property, lenders may also count the expected rent as income. But not all lenders count this equally, which is why borrowing amounts can vary from one bank to the next.
2. Clean up your finances (but don’t rush to cancel things)
Tidying up your finances before applying is an effective way to boost your borrowing power.
Start by looking at any debts you can reduce. If you have small personal loans or high-limit credit cards you don’t use, consider repaying them or lowering the limit.
Also, keep an eye on your spending. Lenders will often review your last few months of bank statements. If they see lots of spending on takeaway, online shopping, or Afterpay, it can raise questions about your money habits.
Large or frequent cash withdrawals can also be a red flag for lenders. Particularly if you get money out at pubs and casinos. This can affect your ability to get a loan.
Now to the big question: Do you have to close your credit cards to get approved?
Not necessarily. In fact, it’s often better to wait. Once your home loan is in place, it might be harder to get a new credit card approved. A broker can run your borrowing capacity both with and without the card. So you can make an informed decision and keep your options open.
3. Boost your income where you can
A higher income helps you borrow more.
This could come from overtime, bonuses, a side hustle, or renting a spare room. Even small extra amounts can help.
Some banks are better than others at recognising these income types. For example, one lender might accept your commission income, while another may not.
One may accept your most recent year’s commission. Others may take an average of the last two years, whilst some take the lower.
If you’re self-employed, strong financial records are key. Tax returns and BAS statements give lenders confidence in your earnings. A good broker can help present your income clearly so you’re not underestimated.
4. Pick the right lender, not just the lowest rate
A low interest rate is great, but it’s not the whole picture.
Lenders all use different rules to assess how much they’re willing to lend. One might be generous with how they treat your income. Another might allow lower living expenses. Some are more flexible with investors or first-home buyers.
The right lender for your situation can make a big difference to your borrowing capacity. A good broker knows who’s most likely to say yes and help you get closer to your goals.
Recently we worked with a client who was “maxed out” with all major lenders. Going with a specialist lender, we unlocked over $1,000,000 extra borrowing capacity.
5. Structure your loan the smart way
How your loan is set up can affect how much you can borrow, and how easy it is to manage your repayments.
For example:
- Investors might choose interest-only repayments to lower monthly costs and improve cash flow.
- Owner occupiers might prefer a loan with an offset account to reduce interest and keep savings accessible.
- If you already own a property, using your equity can boost your borrowing capacity and help you avoid paying lenders mortgage insurance.
The best loan setup depends on what you’re trying to achieve. This is something a broker can tailor to suit your goals.
6. Don’t try to do it all on your own
The loan process can feel overwhelming, especially the first time around.
There’s a lot to think about, and it’s easy to make small mistakes that reduce how much you can borrow.
You don’t have to do it alone.
A good broker can help you:
- Understand how much you can borrow
- Get your finances in shape
- Find the right lender for your needs
- Structure your loan properly
- Avoid delays and confusion during the process
Even one conversation can help clear things up and give you the confidence to take the next step.
7. Thinking long-term? Look at structures early
If you’re hoping to build a property portfolio in the future, borrowing in your own name may only get you so far.
Some investors choose to buy through a family trust or a company structure. These setups can help with tax planning, asset protection, and borrowing flexibility.
But here’s the thing. These structures take time to set up and need advice from both legal and tax experts. You can’t do it at the last minute.
If you’re thinking about going down this path one day, it’s a good idea to start asking questions early. That way, you can plan ahead and avoid having to untangle things later.
Final thoughts
Your borrowing capacity isn’t just a number.
It shapes what you can buy, where you can live or invest, and how quickly you can act when you find the right opportunity.
With the correct advice, you’ll improve your borrowing capacity to strengthen your position. Avoid costly mistakes, and make decisions that support your long-term goals.
The earlier you start, the more options you’ll have. Being better prepared will benefit you long term, not just for your next purchase
After all, you wouldn’t do your own dental work to save a few dollars. So don’t DIY your biggest financial decisions either.
