How can I increase my borrowing power?

Have you ever found your perfect home, but when you reviewed your borrowing capacity, discovered you're falling short? To help you across the finish line to secure your dream home, you might be able to increase your borrowing capacity.

It’s almost always a good idea to not borrow more than you can afford. However, you could do a few things to improve your finances that can potentially make it easier to borrow more money.

Save a sizable deposit

When purchasing a property, the deposit is a key part of working out how much you need to borrow. 

Every home loan has a minimum Loan to Value Ratio (LVR), which refers to how much you’re borrowing compared to how much the property is worth. Most lenders prefer an LVR of 80% or less, meaning you’d need to pay a deposit of 20% of the property value upfront. 

For example, if you’ve saved up $100,000 for a deposit, you could potentially apply for a loan of up to $400,000 to buy a $500,000 property. But if your deposit it $120,000, you could potentially borrow $480,000 to by a $600,000 property. 

You may still be able to apply for a home loan with a deposit of 10% or even 5% of the property value, reducing the LVR to 90% or 95%, but increasing the amount you’re borrowing. However, this will mean adding the cost of Lender’s Mortgage Insurance (LMI) to your budget – the smaller your deposit, the more you may have to pay for LMI. 

Assess your expenses 

While you may not be able to raise your income magically when purchasing a property, you can often manage your expenses in a way that makes more money available in your budget. Review your bank accounts to see how much you spend each month and where that money goes. 

When evaluating your borrowing capacity, most lenders usually divide your expenses into different categories, including utilities, food, transport, healthcare, entertainment, and dining out. 

If you want to increase your borrowing capacity and make yourself more attractive to lenders, you could make a budget based on these categories and attempt to find:

• Recurring expenses that can be minimised 
• Regular payments that can be eliminated entirely 
• Costs that cannot be avoided 
• One-time fees that don't occur regularly

The aim is to identify ways to save money on items that you either spend too much on or don't need at all. This can also help you pick up on direct debits or other regular expenses you may have forgotten about.

In the months leading up to your home loan application, you could try to cut back on your expenses. Lenders will usually want to examine your expenses for up to six months before the date on your application. So, living on a tight budget for just a month might not be enough, but if you can show you’ve made a long-term commitment to tightening your budget, some lenders may see that as a positive. 

Strengthen your credit history

Lenders will check your credit history during your home loan application process. Maintaining a clean credit history can potentially help to increase your borrowing capacity. 

Paying all of your utility bills on time, even the smallest ones, might work towards establishing you as a reliable borrower in the eye of a potential lender. This can then potentially enhance your borrowing capacity and your chances of approval.

Before you apply for a loan, it's a good idea to get a copy of your credit report to see what a lender will see and correct any issues. 

Consider choosing an extended loan term 

You may be thinking of taking out a home loan with a shorter term length, such as 25 or 20 years, in order to pay off your property faster. However, this means that your repayments will be higher, as each repayment will be made up of a higher percentage of the loan principal plus interest. But if you instead opt for a longer loan term, such as 30 years, each repayment will be smaller.

If you can comfortably afford the repayments on a 20 year home loan, you may potentially be able to improve your borrowing capacity by instead opting for a 25 or 30 year loan. 

For example, according to RateCity’s Mortgage Calculator, if you applied for a $500,000 mortgage, paying principal and interest monthly at a rate of 3.24% over a 20 year term, your monthly repayments would be $2833. If you can afford these monthly repayments, by instead choosing a 30 year loan term you could potentially borrow up to $651,777 (calculations are an estimate for illustrative purposes only, assume that the interest rate stays the same for the full loan term, do not include fees or other charges). 

If your financial position allows it, in the future you may be able to take advantage of refinancing, an offset account or early repayments to pay off your home loan sooner. 

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