How to increase your borrowing power

If you're looking to buy a property, having an idea of how much you can borrow will help you narrow down your search.

How much you’ll be approved to borrow largely comes down to whether you’re financially capable of meeting repayments for a given loan amount. Before approving you for a home loan, a lender needs to weigh up your income and your expenses, and decide if the loan amount you’ve applied for will fit into your budget comfortably.

The good news is, it’s not set in stone. If you’ve worked out how much you could borrow and are hoping to make that number a little higher, there are a few things you can do to show a lender you're capable of handling a larger loan amount.

1. Save a hefty deposit

Your loan-to-value ratio is how much of the property’s value you’re borrowing, compared to how much you’ve saved as a deposit. Generally, a higher loan-to-value ratio (which means a smaller deposit) makes you a riskier borrower - so the bigger your deposit, the more you can borrow without posing any extra risk.

2. Build up a track record of responsible saving

It’s important to be able to show genuine savings when applying for a home loan, so start making regular contributions to your savings account at least 6 months before putting in a loan application. This is especially important if a large part of your deposit was a gift or inheritance, because it shows that you know how to save and budget effectively. 

3. Limit your unnecessary spending

The flipside of saving is keeping an eye on your spending. It’s a good idea to start cutting back on frivolous spending at least 3-6 months before making a loan application. Not only will this show that you’re financially responsible, but it’s also a good habit to get into to help you meet future loan repayments.

4. Opt for a longer mortgage term

Stretching your loan out over a longer period of time will mean lower monthly repayments. So if you opt for a long loan term, it’s more likely you’ll be able to borrow a larger overall amount and still be able to meet your monthly repayments comfortably. Just be careful with this tactic, because a longer loan term will also mean that you ultimately pay more interest over the life of the loan.

5. Give your credit score a health check

One of the big things a lender will look at when deciding your borrowing capacity is your credit history and credit score. Maintaining a high credit score is a good sign that you can handle repaying a loan. So before you apply, start taking steps to improve your credit score, including getting a free copy of your credit report and fixing any mistakes in it.

6. Stay on top of repayments

Part of maintaining a good credit score is being sure to make any repayments you currently have on time and in full. That includes paying off the full balance of your credit card each and every month, not just the minimum. By meeting all your current repayments, you’ll show that you’re the kind of borrower who can budget and organise your finances well enough to meet bigger loan commitments.

7. Reduce your available credit

If you have credit cards you don't use, now is the time to close those accounts. When you're making a loan application, other sources of credit can be seen as sources of potential debt, even if you aren’t currently using the full credit limit. Having too much credit readily available to you may limit the amount you’ll be approved to borrow, just in case you overstretch yourself in the future and wind up unable to meet all your repayments.

8. Pay down other debts

Whether it’s a car loan, store card or lingering credit card balance, clearing other debts as much as possible before applying for a home loan is a great idea. Putting in an application when you have a clean slate and no other debts could boost the amount you can borrow, because it removes the major expense of other repayments, leaving you with plenty of room in your budget for handling a larger home loan.