Buying your first home is exciting, but the journey often begins with a reality check. When lenders assess how much they may be willing to lend you, the figure can sometimes fall short of what you had in mind. The good news is that there are practical steps you can take to boost your borrowing power and potentially improve your position. Understanding the factors that influence your borrowing capacity is the first step toward putting together a stronger application.
Understanding What Lenders Look At
Before exploring ways to boost your borrowing power, first home buyers should understand how lenders arrive at their figures. While each lender has its own criteria and assessment methods, most focus on similar fundamentals.
Your Income and Employment
Lenders want to see stable, verifiable income. Full-time permanent employment is often viewed favourably, though casual workers, contractors, and self-employed applicants can also demonstrate their earning capacity with appropriate documentation. The key is showing consistency over time. If you have recently changed jobs or industries, some lenders may want to see you settled in your new role before considering your full income.
Your Existing Debts and Commitments
Every financial commitment you carry affects your borrowing capacity. This includes personal loans, car finance, HECS-HELP debts, afterpay or buy now pay later accounts, and credit card limits. Importantly, lenders typically assess your credit card limit rather than your current balance, meaning an unused card with a high limit could still reduce how much you can borrow.
Your Living Expenses
Lenders examine your spending habits to understand your financial behaviour. They may use the Household Expenditure Measure as a baseline, but they also review your actual bank statements. High discretionary spending on things like entertainment, dining out, or subscriptions can influence their assessment of your capacity to service a loan.
Practical Steps to Strengthen Your Position
While there are no guarantees about loan approval or borrowing amounts, taking deliberate steps to improve your financial profile may help your application.
Reduce or Close Unnecessary Credit
If you have credit cards you rarely use, consider reducing the limit or closing them entirely. The same applies to any buy now pay later accounts or store credit facilities. Reducing your available credit can free up capacity in a lender’s assessment. Keep in mind that closing accounts may affect your credit history, so it can be worth discussing with a broker before making changes.
Pay Down Existing Debts
Clearing personal loans, car finance, or other debts before applying can improve your debt-to-income position. Even making significant progress on these balances demonstrates responsible financial management. If you carry a HECS-HELP debt, be aware that lenders factor in the compulsory repayment amount based on your income.
Review Your Spending Habits
In the months leading up to your application, take a close look at your bank statements. Lenders often review several months of transaction history, so consistent saving behaviour and reduced discretionary spending may reflect well on your application. This does not mean you need to live on two-minute noodles, but being mindful of your spending patterns could make a difference.
Consider Your Deposit and Loan Structure
The size of your deposit and how you structure your loan can also influence your borrowing position.
A Larger Deposit May Help
A bigger deposit means borrowing less relative to the property value. This could reduce your loan-to-value ratio, which may open up more competitive interest rate options and reduce or eliminate the need for lenders mortgage insurance. Of course, saving a larger deposit takes time, so there are trade-offs to weigh against your personal circumstances and the property market you are looking at.
Government Schemes and Guarantor Options
Depending on your eligibility, various government schemes may assist first home buyers with smaller deposits. A family member acting as a guarantor is another option some buyers explore, though this carries significant responsibilities and risks for the guarantor that should be carefully considered. These pathways have their own criteria and limitations, so professional guidance is valuable.
Why Professional Guidance Matters
Every borrower’s situation is different. What works for one person may not suit another, and lender policies vary considerably. A mortgage broker can help you understand your current position, identify areas for improvement, and match you with lenders whose criteria may suit your circumstances. They can also help you avoid common missteps that could affect your application.
If you are looking to understand your options and explore ways to boost your borrowing power, the team at Gloss Finance can help you navigate the process. Reach out to discuss your situation and take the first step toward your home ownership goals.
