What happens if you've found the perfect property, you're happy(ish) with the price, and you've checked your borrowing capacity and everything looks good... almost. You realise you're coming up just short, by a matter of a few thousand dollars, or maybe $10-20k? What are your options?
You might be able to increase your borrowing capacity over a couple of months to get you over the line, by following these steps.
Save a bigger deposit
Cut back on your spending
Repay your debts
Sort out your mortgage paperwork
Check your capacity with several lenders
Talk to a mortgage broker
1. Save a bigger deposit
It seems obvious but it's true: saving a bigger deposit makes it easier to boost your borrowing capacity.
Here's the difference between a 10% deposit and a 20% deposit and the loan amounts you'll need with a $600,000 property.
Property price
10% deposit
20% deposit
Property price
$600,000
$600,000
Deposit
$60,000
$120,000
Loan amount
$540,000
$480,000
That's quite a difference. Let's try the same thing with a $700,000 property.
Property price
10% deposit
20% deposit
10% deposit
$70,000
$140,000
Loan amount
$630,000
$560,000
Having a larger deposit means a lender will be more likely to approve your application. But of course, simply saving a bigger deposit is easier said than done and certainly not realistic for every borrower.
Luckily, there are many other ways to boost your borrowing power.
Okay, admittedly, it's not fun – but every dollar you avoid spending is a dollar you save.
Look at your bank accounts and work out how much you spend every month. Focus on the most recent 3-6 months, because that's what your lender will do.
When determining your borrowing capacity, lenders look at spending across a variety of categories including utilities, groceries, transportation, health, entertainment and eating out.
Draw up a budget with these categories and try to identify things regular expenses you can cut back on, ones you can't, and ones you can cut out completely.
Be realistic but be as ruthless as you can. You have a goal in mind: buying a home. Keep that as your guiding light!
Make sure you cut back on spending in the months leading up to your home loan application. Your lender will look at up to 6 months' of your spending. So living like a hermit on a diet of bread and water for just 1 month won't be enough.
You're better off trimming your spend realistically and sticking to a budget for a few months before applying.
Here's a quick example of a monthly budget before and after a ruthless cost-cutting exercise and switching to cheaper products (using costs and products from Finder's database).
How to cut back on your spending
Expense category
Current cost
Cheaper option
Savings
Home & contents insurance
Current monthly premium: $195
New monthly premium: $89
$106
Car insurance
Current monthly cost: $109.64 (comprehensive)
New monthly cost: $32.36 (comprehensive)
$77.28
Phone
New smartphone contract plan: $95.74
Cheapest prepaid SIM only plan: $28.40
(keep your old phone)
$67.34
Energy
Most expensive plan: $413 per quarter
Cheapest plan: $294 per quarter
$39
Broadband
Unlimited high-speed NBN plan: $69.99 per month
Unlimited lower speed NBN plan: $49.90 per month
$20.09
Digital subscriptions
Netflix, Stan and Spotify
Cancel one subscription and drop back to a free Spotify account with advertising.
The more outstanding debt you have the less you can borrow for a home loan. It sounds obvious but again it needs to be said: shrink your debts, boost your borrowing power.
Simple. Well, not quite. Not all debts are equally urgent.
HECS/HELP debt from tertiary education is much less urgent because you're not charged interest. It might diminish your borrowing power slightly, but you're likely better off focusing on any urgent debts, or using extra cash for your deposit rather than immediately dealing with this debt.
Expert tip to boost your borrowing capacity:
Andrew Mirams is the managing director of Intuitive Finance and has around 3 decades of experience in the mortgage industry. He shares a few insider tips to help you improve your borrowing capacity, as well as your chances of being approved for your chosen loan.
Document your finances. This should include all incomings and outgoings, so you can provide a thorough assessment of your regular living expenses. This is particularly important for self-employed borrowers, who can be faced with a tougher loan serviceability assessment.
Reduce your credit card limits. Many borrowers don't understand that it's the total limits of your credit cards that are counted in serviceability calculations, not just the outstanding balance, so consider cancelling some of them if you can, or at least lowering the limits. Reducing the limits on your credit cards can have a positive impact on your borrowing power.
Compare home loans. One of the easiest ways to improve your borrowing capacity is to shop around for a cheaper interest rate, because that boosts the amount of principal you can borrow. Consider a number of different options and perhaps look for a mortgage broker that specialises in your situation, such as a low-deposit or low-doc home loan.
4. Sort out your mortgage paperwork
The more accurate information you can provide your lender the better your chances of increasing your borrowing capacity.
Every lender's application system is different. But generally you will need:
Documents to verify your identity.
Up to 6 months of bank statements detail your saving and spending.
A letter from your employer verifying your employment. Not every lender asks for this. Regular PAYG income in your bank account is often enough.
A history of genuine savings. This means you can't just "borrow" $50,000 from your parents to pad out your account to make your balance look better. Money needs to be sitting in your account for 3-6 months prior to your application to count as genuine savings.
Information about your assets. If you have other assets such as shares or investments then make sure you can verify them. This will potentially boost your borrowing capacity too.'
5. Check your borrowing capacity with multiple lenders
Every lender calculates your borrowing power according to their own formula. You'll never get the exact same figure with each lender. So look at multiple lenders and try to use their borrowing power calculators. Keep in mind that these are always estimates only.
To give you a sense of how your borrowing power differs with each lender here are four examples taken from actual lender websites. For each example all expense details are identical:
Number of borrowers: 2
Number of dependents: 0
Purchase: Home (not investment)
Combined income (pre-tax): $140,0000
Total credit card limit: $1,000
Expenses (monthly): $4,300
And here are the results:
Bank 1: You can borrow up to $857,000
Bank 2: You can borrow up to $716,000
Bank 3: You can borrow up to $642,200
Bank 4: You can borrow up to $830,000
Even based on this random sample (we looked at two Big Four banks and two smaller lenders) the difference in borrowing capacity is as much as $214,800. That's huge.
Compare widely, but apply only once
Don't apply with multiple lenders! Just do some research and estimate your borrowing power. You can even try and get mortgage pre-approval from lenders (this gives you a rough but useful estimate of how much a lender will give you).
But you should only aim to submit one application for the lender you actually wish to go with. Multiple credit applications and rejections look bad on your credit score and can lead to failed applications or a diminished borrowing capacity.
Expert insight: Why is my borrowing capacity so low? It could be your credit card
"If you've got credit cards, try and pay them off and cancel them before applying for a loan because it gives you greater borrowing power. It's a myth that you need a good credit score through a credit card to get approved for a home loan as your credit rating is what it is. If you're a first-time borrower and never had a loan, your rating won't be great – it might be around 700 – but it's better than having 800 with two credit cards."
If you're serious about borrowing more than your current capacity then talk to a mortgage broker.
One of the key benefits of a broker is that they can help you organise your application and help you find lenders that will accept your application. Your broker will have a pretty good sense of your realistic borrowing capacity (once you go through your finances with them) and can match you to a suitable lender.
You can do this on your own, of course. But a broker can often make it easier and give you a slight edge when you're trying to borrow a little bit more.
Need more help? You can compare loans in the table below or get in touch with an expert mortgage broker. If you have a question you can also drop in the comment box at the bottom of the page and we'll do our best to answer it.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 562 Finder guides across topics including:
As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio
Sarah's expertise
Sarah has written 192 Finder guides across topics including:
When you apply for a home loan, a lender will take many serviceability factors into consideration when deciding whether or not to approve your application.
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