How To Increase Borrowing Capacity: 12 Tips

If you want to buy a house, a good starting place is finding out how much you can borrow for a home loan. Knowing how much the bank will lend you will help you search for properties in your price range. However, if that dream property you’ve had your eye on is out of range, don’t worry. As long as you understand the risks of borrowing more money, you can learn how to increase your borrowing capacity.

1. Improve your credit score
2. Clear your debts
3. Get rid of any excess credit
4. Get your papers in order
5. Choose the right product
6. Save for a higher deposit
7. Reduce your expenses
8. Earn more income
9. Take out a longer mortgage term
10. Partner with someone
11. Take out a fixed-rate loan
12. Change repayments to interest-only

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Lenders determine your borrowing capacity based on various factors, such as your salary, the deposit amount you’ve saved, and your credit history. You can get a rough estimate of your borrowing capacity by keying a few details into a loan calculator.

1. Improve your credit score

Prospective lenders will run a credit check once you apply for a home loan. So, before filling out any applications, ensure you know what’s in your credit report. That way, you can identify and fix errors and start taking steps to make improvements where necessary.

If you have a chequered financial history with missed loan repayments, you should pay special attention to improving your credit score. Steps include repaying all your loans on time — including credit cards, utility bills and rent — for at least six months to repair any damage to your rating.

A good credit score means less risk to the lender, meaning they may be willing to offer you more money.

» MORE: Can you get a home loan with bad credit?

2. Clear your debts

A lender will look at all your outstanding debts and your ability to service your mortgage repayments on top of those debts.

Before applying for a mortgage, clear existing debts such as credit cards and personal loans. Doing so will show you are disciplined in paying off your debts but also that you now have greater capacity to pay off a larger mortgage amount.

» MORE: 7 money management skills to master ASAP

3. Get rid of any excess credit

Similarly, consider limiting any existing credit available through credit cards and other loans.

Access to a relatively large line of credit may be suitable for an emergency, but it can impact how much you can borrow. For example, even if you have a credit card with little or no balance owing but a credit limit of $20,000, that amount will be factored into your lender’s loan calculations.

So, if you want to maximise your borrowing capacity, getting rid of any credit you don’t need is generally a good idea.

» MORE: What to consider before increasing your credit card limit

4. Get your papers in order

Your lender must review various documents throughout the home loan application process. Double-check that everything is in order so your lender has a clear, up-to-date picture of your finances.

Steps to take include ensuring you have the latest details regarding your savings, investments and outstanding debts ready for your lender. You’ll also need your tax return and BAS-statement information.

Of course, this process is much easier if you already have accounts with that lender. But, if not, gathering everything shouldn’t take too long. It’s an easy and helpful way to demonstrate your finances are in order.

» MORE: 9 tips for getting a mortgage when self-employed

5. Choose the right product

More types of home loans and mortgage products are on the market than ever, thanks to greater competition.

You should shop around for the right product to maximise your borrowing capacity. A mortgage broker can come in handy here, as they can access a wide array of mortgages and help find the best one for you.

Loan features can also affect how much you can borrow. So, once again, it’s best to talk to a mortgage broker or financial adviser for guidance. You can discuss the features you need, and they’ll explain their effect on your borrowing capacity.

» MORE: How to find the right mortgage broker

6. Save for a higher deposit

Saving for a home deposit may be the largest financial initiative you’ve ever undertaken, especially as a first-time home buyer.

It is well worth saving that little bit extra, though, as the more you can demonstrate that you’ve saved, the more a lender should be willing to lend you. Additionally, having a larger deposit means borrowing less capital and paying off far less over the mortgage term.

Remember that you’ll need evidence that you’ve saved the deposit rather than just borrowing it or receiving it as a gift from a family member.

» MORE: What is ‘genuine savings’?

7. Reduce your expenses

Lenders look at your savings and ongoing expenses when calculating how much they’ll lend you. So, anything you can do to lower these costs will serve you well.

Start by checking your budget to see what changes you could make. Then, review monthly expenses, like your internet plan, phone bill, utility bills and petrol costs, to see if there are ways to reduce your monthly costs.

» MORE: Ways to save money on a tight budget

8. Earn more income

Earning more money is good for improving borrowing capacity, especially if you can demonstrate that it’s regular income.

There are plenty of ways to make money online, offline and at home. Options include taking extra shifts or overtime at your current job, driving an Uber on weeknights or weekends or selling items on Amazon or eBay.

» MORE: What is passive income?

9. Take out a longer mortgage term

Lenders tend to offer higher amounts to those taking out longer mortgages. That’s because they derive more interest payments over the 25 or 30 years of the mortgage.

As long as you know you’re paying more, a longer mortgage term may suit your current needs. Once again, though, it’s a good idea to talk to a mortgage broker or financial planner about the pros and cons of this strategy.

» MORE: How long will it take to pay off my mortgage?

10. Partner with someone

One way to increase your borrowing capacity is to buy a house with someone else. You can do this with a partner, a family member or a friend if you’re single, through a joint tenancy or tenancy in common arrangement.

If you’re struggling to come up with a deposit, or you simply wouldn’t be able to afford the monthly repayments on a property yourself, these options are worth considering. Co-buying could be a particularly effective strategy — or at least a good way to get your foot in the door.

» MORE: What is a guarantor home loan?

11. Take out a fixed-rate loan

Your bank may be willing to lend you more if you take out a fixed-rate loan. That’s because the repayments are predictable for an introductory period, usually up to a maximum of five years.

Fixed-rate loans are risky, though. Once that period is over and the loan moves back to a standard variable interest rate, the repayments may suddenly skyrocket, leaving you floundering.

» MORE: How to avoid mortgage stress

12. Change repayments to interest-only

Another way to potentially get a bigger mortgage is to take out an interest-only home loan where you only pay off the interest on the loan for an agreed-upon period. These loans are typically only viable if you plan to invest the money you would have used to pay off the principal somewhere more lucrative.

However, this strategy is fraught with danger. Once again, you should talk to a mortgage professional about what’s best for you.

» MORE: 10 questions to ask your mortgage broker