Simple hacks to boost your borrowing capacity

Most people assume borrowing capacity is all about how much you earn, but lenders look at about a dozen different things before they decide what you can borrow.

Your monthly expenses, the debts you're already carrying, even the type of loan you're applying for all shift the number up or down. A buyer earning $90,000 might borrow less than someone on $75,000 if their credit card limits are high or they've got a car loan sitting in the background. Understanding what lenders actually measure gives you room to move before you even apply.

What lenders actually count when they calculate borrowing capacity

Lenders assess your income, subtract your living expenses and existing debts, then apply a buffer to make sure you can still afford repayments if rates go up. The serviceability buffer is currently 3.0 percentage points above the actual loan rate, so if you're looking at a variable rate around 6.2%, the bank will test whether you can service the loan at 9.2%. That's a big jump, and it cuts into how much you can borrow more than most buyers expect.

Consider a buyer in Marrickville earning $95,000 a year with no dependents. They've got a $15,000 car loan, a credit card with a $10,000 limit they barely use, and monthly living expenses around $2,200. Even though they only owe $3,000 on the card, the lender treats the full $10,000 limit as potential debt. When the assessment runs, that buyer might be approved for around $520,000 to $540,000 depending on the lender, but if they close the card and pay out the car loan before applying, that figure could push past $600,000. The shift comes from reducing the monthly commitments the lender has to account for in the serviceability test.

The credit card limit problem that catches people out

Credit card limits get calculated as though you've maxed them out, even if the balance is zero. A $20,000 limit can reduce your borrowing capacity by $100,000 or more depending on your income and the lender's assessment rate. If you've got cards you don't use or limits higher than you need, closing them or reducing the limit before you lodge a home loan application can make a material difference to what you're approved for.

In our experience, buyers who've held onto old cards from university or travel cards they opened years ago don't realise those limits are still being counted. One call to the bank sorts it, but you need to do it at least a month before applying so the update shows on your credit file.

How living expenses get assessed across different lenders

Lenders use one of two methods to calculate your living expenses. Some apply a benchmark figure based on the Household Expenditure Measure, which is a standardised estimate that increases with your income and the number of dependents. Others let you declare your actual spending and will accept that figure if it's higher than the benchmark. If your real expenses are lower than the HEM figure, most lenders will still use the HEM, so there's a floor built in.

For someone buying in Marrickville, this matters because inner west living costs, particularly if you're renting near Addison Road or around Marrickville Metro, can be higher than the suburbs but also more predictable. If you're spending $2,800 a month and the HEM says $3,200, the lender uses $3,200. That reduces your assessed surplus income and pulls your borrowing capacity down. You can't argue the HEM lower, but if your actual spend is genuinely higher because of childcare or medical costs, declaring it accurately and providing proof can sometimes work in your favour with lenders who allow declared expenses.

Why your deposit size shifts what you can borrow

Borrowing capacity isn't just about serviceability. If the amount you want to borrow pushes your loan-to-value ratio above 80%, you'll need to pay for lenders mortgage insurance, and that premium gets added to the loan amount. The higher the LVR, the higher the premium, and that extra cost reduces how much you can actually borrow for the property itself.

If you're using the Australian Government 5% Deposit Scheme, the guarantee replaces LMI, so your borrowing capacity isn't reduced by the premium. For Marrickville, the property price cap under that scheme is $1,500,000, which covers most of the market here including townhouses and older units around Illawarra Road or near the old Cooks River heritage precinct. If you're planning to use that scheme, check with your broker early because not all lenders are on the panel, and the ones that are sometimes have slightly different serviceability policies.

Fixed rate vs variable rate and how it changes the numbers

Some lenders assess your borrowing capacity differently depending on whether you're applying for a variable rate, fixed rate, or split loan. Fixed rates are usually lower than variable rates right now, but the serviceability test still applies the 3.0 percentage point buffer on top of the fixed rate for the term of the fix. After that term, the lender assumes you'll revert to a standard variable rate and tests that scenario as well. If the revert rate plus buffer pushes your repayments too high, it can limit what you're approved for even though the initial fixed period looks affordable.

A split loan structure, where part of the loan is fixed and part is variable, sometimes lets you borrow a bit more because the blended rate used in the assessment can be marginally lower, but it depends on the lender's policy and the rates available at the time. It's not a huge difference, but if you're right on the edge of what you need, it's worth checking how different loan structures affect the assessment.

Income types that get treated differently

Salaried income is straightforward, but if you're self-employed, on a contract, or earning commission, overtime or rental income, the lender will apply a different calculation. Self-employed buyers usually need two years of tax returns, and the lender averages your taxable income across both years. If you've had a strong year followed by a weaker one, that average pulls your assessed income down. Overtime and bonuses are often shaded, meaning the lender only counts 80% or 50% of that income depending on how consistent it's been.

Rental income from an investment property is usually assessed at 80% of the actual rent to account for vacancy and maintenance costs. If you're buying in Marrickville and you already own an investment property in another suburb, that rental income can help your borrowing capacity, but the loan repayments and costs on that investment property will also reduce it. The net effect depends on whether the property is positively or negatively geared and how the lender structures the assessment.

Reducing existing debts before you apply

Paying down or paying out existing debts before you lodge your application is one of the most direct ways to increase what you can borrow. Car loans, personal loans, HECS-HELP debts, and buy now pay later accounts all reduce your surplus income in the lender's assessment. HECS is calculated as a percentage of your gross income once you're above the repayment threshold, and that percentage increases with your income. For someone earning $100,000, the annual HECS repayment might be around $6,000, which is $500 a month the lender has to subtract from your serviceability.

Buy now pay later services like Afterpay or Zip are treated as unsecured credit, and even if you've got no balance, lenders will often assume a monthly commitment based on your transaction history or apply a standard figure. If you've used these services in the past six months, expect them to show up in the assessment. Closing the accounts before you apply removes them from the calculation entirely.

The link between borrowing capacity and loan features

Some home loan features, like an offset account or redraw facility, don't directly change your borrowing capacity, but the interest rate attached to the loan product you choose does. A loan with a rate 0.3% higher than another option means the lender tests your serviceability at a higher figure, which reduces how much you're approved for. The difference might only be $15,000 to $20,000 in borrowing capacity, but if you're buying near the top of your range, that can matter.

If you're weighing up loan features, run the numbers on what you're actually approved for under each product, not just what the repayments look like at today's rate. A loan with more features but a higher rate might feel more flexible, but it could also mean you can't borrow enough to buy the property you want.

When to get your borrowing capacity assessed

Getting a formal assessment done early, before you start looking at properties, gives you a clear number to work with and shows sellers you're in a position to move quickly. Pre-approval isn't a guarantee, but it's based on a full assessment of your finances and it's usually valid for three to six months depending on the lender. If your income or commitments change during that time, the pre-approval might need to be reassessed, but it gives you a starting point that's a lot more reliable than an online calculator.

If you're planning to buy in Marrickville and you're still renting locally, factor in how long it'll take to get your documents together. Payslips, tax returns, bank statements, and proof of savings all need to be current, and some lenders want three months of statements while others want six. The sooner you get that sorted, the sooner you know what you're working with.

Using a broker to compare serviceability across lenders

Borrowing capacity varies between lenders because they each use different serviceability models, different expense benchmarks, and different ways of assessing income types. One lender might approve you for $580,000 while another offers $630,000 based on the same financial position. A mortgage broker has access to the serviceability calculators for multiple lenders and can tell you which ones are likely to give you the highest borrowing capacity based on your specific circumstances.

If you've got a slightly complicated income structure, existing debts, or you're using a government scheme, a broker can also flag which lenders are more flexible in those areas and which ones apply stricter overlays. That saves you from applying to a lender who's going to knock you back or approve you for less than you need.

Call one of our team or book an appointment at a time that works for you. We'll run through your full financial position, show you what different lenders will approve you for, and help you sort out anything that's pulling your borrowing capacity down before you apply.

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