Thinking about applying for a home loan? Before you do, it's worth understanding what affects your borrowing capacity. While your income is important, lenders also look at your expenses, existing debts and overall financial position. The good news is that a few simple changes could improve how much you're able to borrow. Here are three practical ways to strengthen your borrowing capacity before you apply.
Key Takeaways
- Review your living expenses and cut unnecessary costs.
- Negotiate a lower interest rate on existing loans where possible.
- Reduce or close unused credit cards and BNPL accounts.
- Pay down personal loans to improve your financial position.
- Speak with a mortgage broker before applying to understand your borrowing potential.
Top Tips to Improve Your Borrowing Capacity Before Applying for a Home Loan
If you're planning to buy your first home, upgrade to a larger property, or invest in real estate, your borrowing capacity plays a major role in determining how much you can borrow.
Many Australians assume their income is the only factor lenders consider. In reality, lenders also assess your living expenses, existing debts, financial commitments and overall money management. Even small improvements can make a noticeable difference to your borrowing power.
Here are three practical ways to strengthen your borrowing capacity before applying for finance.
1. Review Your Living Expenses
One of the easiest places to start is by taking a close look at your everyday spending.
It's common to have subscriptions or recurring payments that no longer provide value. Unused gym memberships, multiple streaming services, expensive insurance policies or frequent discretionary spending can all impact the amount a lender believes you have available to repay a loan.
Reducing unnecessary expenses doesn't just improve your monthly cash flow. It also demonstrates responsible financial habits, which lenders value when assessing your application.
Consider reviewing:
- Streaming subscriptions you no longer use.
- Gym memberships or memberships that are rarely used.
- Insurance policies that could be compared or renegotiated.
- Regular discretionary spending that could be reduced temporarily.
Even modest savings each month can strengthen your financial position over time.
2. Negotiate a Better Interest Rate
If you already have a home loan, don't assume your current interest rate is the best available.
Australia's lending market is highly competitive, and many lenders are willing to review their rates to retain existing customers. A simple phone call could result in a lower interest rate, reducing your monthly repayments and improving your overall financial position.
In some cases, even a small reduction, such as 0.15%, can improve your borrowing capacity by thousands of dollars, depending on your circumstances.
If your lender isn't willing to negotiate, it may be worth exploring whether refinancing to a more competitive loan is appropriate for your situation.
3. Reduce Existing Debts and Credit Commitments
Lenders assess more than just the debts you actively use—they also consider the credit you have available.
Credit cards, personal loans and Buy Now, Pay Later (BNPL) accounts can all reduce your borrowing capacity, even if you rarely use them. This is because lenders generally assume those facilities could be drawn upon at any time.
Before applying for finance, consider whether you can:
- Close credit cards you no longer need.
- Pay out personal loans where possible.
- Cancel unused Buy Now, Pay Later accounts.
- Consolidate debts if it makes financial sense.
Reducing your liabilities can increase the amount of disposable income available for loan repayments, making your application more attractive to lenders.
Why Borrowing Capacity Matters
Your borrowing capacity influences more than just the size of your loan. It can also affect:
- The types of properties you can consider.
- Your buying confidence during negotiations.
- Your ability to refinance or invest in the future.
- The flexibility of your overall financial plan.
Preparing your finances before lodging an application often leads to a smoother lending process and can improve your chances of approval.
Speak With BOC Finance Before You Apply
Every lender assesses borrowing capacity differently, and the right strategy depends on your personal circumstances.
At BOC Finance, we help Australians understand what lenders are looking for and identify practical ways to improve their borrowing position before they apply. Whether you're purchasing your first home, refinancing or investing, our experienced mortgage brokers can help you explore lending options that suit your goals.
If you're thinking about applying for finance, speak with the team at BOC Finance for personalised guidance and expert support.
Frequently Asked Questions
How is borrowing capacity calculated?
Borrowing capacity is based on several factors, including your income, living expenses, existing debts, savings, employment stability, credit history and the lender's own assessment criteria. Every lender has slightly different policies, so your borrowing capacity can vary between lenders.
Does having a credit card reduce my borrowing capacity?
Yes. Even if you don't owe money on your credit card, lenders usually assess the full credit limit as a potential liability. Reducing your credit limit or closing unused credit cards may improve your borrowing capacity.
Do Buy Now, Pay Later accounts affect home loan applications?
They can. Buy Now, Pay Later (BNPL) accounts are often treated as ongoing financial commitments by lenders and may reduce your borrowing capacity or prompt additional questions during the assessment process.
Can reducing my living expenses increase how much I can borrow?
Potentially, yes. Lenders review your regular spending to determine how much income is available to service a loan. Reducing unnecessary expenses can improve your cash flow and strengthen your borrowing position.
Will paying off a personal loan help my borrowing capacity?
In many cases, yes. Paying off or reducing personal loans lowers your monthly financial commitments, which may increase the amount you're eligible to borrow.
Should I improve my borrowing capacity before applying for a home loan?
Generally, yes. Reviewing your finances before submitting a loan application can improve your chances of approval and help you secure a loan that better suits your goals.
Should I speak to a mortgage broker before applying?
A mortgage broker can assess your financial position, explain how different lenders calculate borrowing capacity and recommend strategies that may improve your borrowing power before you apply. This can save time and help you make more informed decisions.
Should I speak to a mortgage broker before applying?
A mortgage broker can assess your financial position, explain how different lenders calculate borrowing capacity and recommend strategies that may improve your borrowing power before you apply. This can save time and help you make more informed decisions.