5 Tips on How to Improve and Increase Borrowing Capacity

Struggling with borrowing limits? You’re not alone. With rising home loan interest rates and tighter lending criteria, many Australians are finding it challenging to secure the funds they need to achieve their property goals. However, there’s good news: with the right strategies, you can improve your borrowing capacity and take meaningful steps toward your financial dreams. Whether you’re earning $70,000 individually or $150,000 as a couple, these five practical tips will help you unlock more borrowing potential.

Why is My Borrowing Capacity Limited?

Lenders assess borrowing capacity based on your income, expenses, liabilities, and the current interest rate environment. For an individual earning $70,000 or a couple earning $150,000 combined, lenders typically evaluate how much of your income is left after covering expenses to determine what you can afford to repay.

High interest rates and conservative lending policies mean your borrowing power might not stretch as far as you’d like. But don’t lose hope! By making smart adjustments to your financial profile, you can increase your chances of securing a larger loan. Here’s how:

Reduce Your Credit Card Limits

One of the simplest ways to improve your borrowing capacity is by reducing your credit card limits. Even if you rarely use your credit card or keep a zero balance, lenders view the limit as a potential liability. For example:

• Scenario: You have a $10,000 credit card limit with a $0 balance. Lenders may still calculate a $300 monthly repayment obligation (based on a 3% minimum repayment rate) against your borrowing capacity.
• Impact: If your monthly income is $5,833 (gross, based on $70k/year) and your living expenses are $3,500, the $300 credit card repayment reduces the amount left for loan repayments, lowering your borrowing power.

Solution: Reduce your credit card limit to $2,000 or $5,000. This small change could free up $150–$240 per month in assessed liabilities, increasing the amount you can borrow.

Extend Your Loan Terms

Extending the loan term from 25 years to 30 years reduces monthly repayments, making it easier to qualify for a larger loan. Here’s how it works:

• Example 1 (Individual):
  • Loan amount: $500,000
  • Interest rate: 5%
  • Monthly repayment (25 years): $2,923
  • Monthly repayment (30 years): $2,684

Impact: Lower repayments free up $239 per month, increasing your borrowing capacity by tens of thousands of dollars.

• Example 2 (Couple):
  • Combined income: $150,000/year ($12,500/month)
  • Loan amount: $750,000
  • Monthly repayment (25 years): $4,384
  • Monthly repayment (30 years): $4,024

Impact: Saving $360 per month improves serviceability, allowing you to borrow an additional $50,000–$70,000 depending on the lender.

Tip: Keep in mind that extending the loan term increases the total interest paid over time. This strategy works best for those focused on maximizing their borrowing power in the short term.

Compare Different Banks and Lenders

Not all lenders assess borrowing capacity the same way. Each has unique policies for evaluating income, expenses, and liabilities, so shopping around can significantly impact how much you’re approved for.

Key Differences Among Lenders:

• Income Assessment: Some banks accept 100% of rental income, bonuses, or overtime pay, while others may only consider 80%.
  • Example: If you earn $20,000 in annual bonuses, one lender may add $20,000 to your assessable income, while another might only add $16,000.
  • Debt Treatment: Interest-only loans are assessed differently. Some lenders base borrowing capacity on interest-only repayments, while others factor in higher principal-and-interest repayments.
  • Example: On a $600,000 loan, interest-only repayments might be $2,500/month, compared to $3,200/month for principal-and-interest. A lender that uses the lower figure can approve a larger loan.

Assessment Rate Buffers:

• Lenders apply a buffer (e.g., adding 3% to the current interest rate) to ensure you can handle future rate increases. This impacts borrowing power differently depending on the lender’s policies.

Action Plan: Work with a mortgage broker to identify lenders with policies tailored to your financial situation. This can unlock thousands more in borrowing capacity.

Leverage Rental Income Strategically

Rental income from existing or future investment properties can enhance your borrowing power by supplementing your regular income. Here’s how to maximize this:

• Example (Individual Earning $70,000):
  • Current property value: $500,000
  • Rental income: $400/week ($1,733/month)
  • Lender adds 75% of rental income ($1,300/month) to your income assessment.
  • Borrowing capacity increases by approximately $100,000, assuming a 6% interest rate.
    
• Example (Couple Earning $150,000):
  • Property value: $1,000,000
  • Rental income: $800/week ($3,466/month)
  • Lender adds 80% of rental income ($2,773/month) to combined income.
  • Borrowing capacity increases by $150,000–$200,000 depending on other factors.
    

Pro Tip: Target high-yield properties to maximize rental income and approach lenders with favorable rental assessment policies. A good broker can model different scenarios to help you make informed decisions.

Boost Your Income and Cut Back Expenses

Your debt-to-income ratio is a key metric lenders use to assess your borrowing capacity. Increasing your income while reducing expenses is one of the most effective ways to improve this ratio.

How to Boost Income:

• Negotiate a Raise: Request a salary increase at work based on your performance.
• Start a Side Hustle: Freelance work, tutoring, or rideshare driving can add hundreds of dollars monthly.
• Partner Income (for Couples): If one partner is unemployed or working part-time, consider taking on additional work to boost combined income.
  

How to Reduce Expenses:

• Pay Off Small Debts: Eliminate personal loans, car loans, or credit card balances to lower monthly obligations.
• Cut Unnecessary Spending: Reduce discretionary expenses like dining out, streaming subscriptions, or impulse purchases.
• Review Insurance and Utilities: Compare providers to ensure you’re getting the best deal.
  

Impact Example (Individual):

• Annual salary: $70,000
• Monthly expenses: $3,500
• Reduce expenses by $500/month (e.g., by consolidating debts and cutting subscriptions).
• Borrowing capacity increases by $30,000–$50,000 depending on lender policies.
  

Impact Example (Couple):

• Combined income: $150,000
• Monthly expenses: $6,000
• Reduce expenses by $1,000/month.
• Borrowing capacity increases by $50,000–$100,000.
  

Tip: Track your spending using budgeting apps to identify areas for improvement. Lenders value consistent savings habits as a sign of financial responsibility.

Conclusion: Achieve Your Financial Goals

Improving your borrowing capacity is about taking control of your finances and working strategically within lender frameworks. Whether you’re earning $70,000 as an individual or $150,000 as a couple, these five tips can help you:

• Reduce credit card limits to lower assessed liabilities.
• Extend loan terms for better cash flow.
• Compare lenders to find the best fit for your financial profile.
• Leverage rental income to supplement your borrowing power.
• Increase income and cut expenses for a healthier financial position.
  

We are here to help you navigate the complexities of property investment and secure the funds you need to build your dream portfolio. Ready to take the next step? Contact us today for expert guidance and a free consultation!