Proven Tips to Improve Your Borrowing Capacity

Your borrowing capacity determines how much a lender will let you borrow, and it changes based on your income, debts, expenses, and the lender's assessment policies.

Most buyers in Maylands focus on saving a deposit without realising their borrowing capacity might be the bigger constraint. You might have $80,000 saved for a deposit but still be approved for less than you need if your debts or living expenses reduce what lenders think you can afford to repay. Understanding how borrowing capacity is calculated puts you in a position to take action before you apply.

How Lenders Calculate What You Can Borrow

Lenders assess your income, subtract your committed expenses and debts, then apply a buffer to the interest rate to stress-test your ability to repay. Most lenders add between 2.5% and 3% to the current variable rate when calculating whether you can service a loan, so even if the current home loan interest rate is lower, you need to prove you could still afford repayments at a higher figure.

Consider a buyer working full-time in Maylands with a gross income of $95,000 per year. They have a car loan with $380 monthly repayments and an outstanding credit card limit of $12,000, even though they pay it off each month. A lender will factor in the minimum monthly repayment on that full credit card limit, roughly $360, plus the car loan, which immediately reduces their borrowing capacity by around $90,000 depending on the lender. Closing that credit card or reducing the limit to $3,000 before applying for home loan pre-approval could lift their borrowing capacity back up by $70,000 or more.

Debt-to-Income Ratios and Why They Now Matter

Some lenders now cap your total borrowing at six times your gross annual income, regardless of how well you service the repayments. This means a household earning $120,000 combined might be limited to a loan amount of $720,000 even if the standard serviceability calculation would allow more. Not all lenders apply this cap, so if you are borrowing near the upper end of your income multiple, your broker can direct you toward lenders without that restriction.

This measure affects Maylands buyers more than it might in outer suburbs because property values around the Maylands precinct, particularly near the train station and Eighth Avenue cafe strip, sit higher relative to median Perth incomes. If your borrowing is constrained by a debt-to-income cap rather than serviceability, switching lenders or restructuring your application with a co-borrower can open up more home loan options.

Declared Living Expenses and the HEM Benchmark

Lenders use either your declared living expenses or a benchmark figure called the Household Expenditure Measure (HEM) to estimate what you spend each month. HEM is based on household size and income, and it is often higher than what applicants declare, especially if they have been living frugally to save a deposit. If your actual spending is lower than HEM, some lenders will still use HEM, which reduces your borrowing capacity even though you are spending less.

In our experience, buyers who rent in Maylands and walk or cycle to work in the city often have lower transport costs than HEM assumes, but those savings do not always translate into higher borrowing unless the lender allows actual expenses to be used. If you are applying with a lender that defaults to HEM and your real expenses are genuinely lower, your broker can move your application to a lender that uses declared expenses, which may lift your approved loan amount.

Income Types That Lenders Treat Differently

Base salary is straightforward, but overtime, bonuses, rental income, and self-employed income are all assessed differently depending on the lender. Most lenders will accept overtime or bonus income if it has been consistent for at least six months and appears on your payslips, but some lenders will shade it by 20% or 50%, and others will not count it at all. Rental income is typically shaded by 20% to account for vacancies and maintenance, so if you own an investment property and are trying to buy an owner occupied home loan in Maylands, the rent you collect will not add as much to your borrowing capacity as you might expect.

Self-employed applicants generally need two years of tax returns, and lenders assess net profit after deductions, not turnover. If you are a tradie or small business owner working around the Bayswater and Morley industrial areas and you have been claiming maximum deductions to reduce tax, your borrowing capacity will reflect the lower declared income. Some lenders allow a one-year assessment for established businesses or accept accountant-prepared profit and loss statements, which can help if your most recent year shows stronger income than prior years.

How Property Type and Loan to Value Ratio Affect Your Approval

Borrowing capacity is not just about your financial position. The type of property you are buying and the size of your deposit also influence how much a lender will approve. If you are buying a unit in one of the older walk-up blocks near Whatley Crescent with a smaller deposit, some lenders will cap your loan to value ratio lower than they would for a house, or they may decline the application entirely if the property does not meet their security criteria.

Lenders Mortgage Insurance (LMI) becomes payable when your deposit is less than 20%, and while LMI allows you to borrow with a smaller deposit, it does not increase your borrowing capacity. You still need to service the loan amount plus the LMI premium, so buyers stretching their borrowing capacity with a 5% or 10% deposit sometimes find the LMI cost pushes them over their serviceability limit. If that happens, bringing in a guarantor or increasing your deposit slightly can bring the loan amount back within range.

Choosing the Right Loan Structure to Preserve Future Flexibility

The loan structure you choose can affect your borrowing capacity down the line. A split loan that combines fixed and variable portions gives you rate certainty on part of the loan while keeping an offset account linked to the variable portion. Offset accounts reduce the interest you pay without reducing your borrowing capacity, because the lender still calculates serviceability on the full loan amount. Interest-only repayments lower your monthly outgoings and can improve serviceability on investment loans, but they do not help you build equity, and most lenders revert you to principal and interest after five years, which increases repayments and can affect your ability to borrow again.

If you are planning to buy an investment property after purchasing your home in Maylands, keeping your owner-occupied loan as principal and interest and maximising your offset helps you build equity while maintaining flexibility to draw on that equity later. Portable loan features also matter if you expect to move within a few years, as they let you transfer the loan to a new property without reapplying or paying discharge fees.

Timing Your Application Around Credit Checks and Rate Movements

Every formal home loan application triggers a credit check, and multiple checks in a short period can lower your credit score and signal to lenders that you have been declined elsewhere. If you are shopping around to compare rates, ask your broker to do that research without submitting full applications. Once you have chosen a lender, submit one application and avoid applying elsewhere unless that application is formally declined.

Variable rate movements also affect your borrowing capacity. If rates rise between the time you get pre-approval and the time you go to formal approval, your borrowing capacity may drop, even though your income and debts have not changed. Pre-approval is usually valid for three to six months, but lenders reassess your position at formal approval, so if you are borrowing at the top of your range, factor in the possibility that capacity might tighten if the rate environment shifts.

Getting your finances in order before you start looking at properties gives you confidence in what you can afford and speeds up the process once you find the right place. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions