How to Increase Your Borrowing Capacity: Strategies and Tips

How to Increase Your Borrowing Capacity in Australia

When it comes to securing a larger loan, whether for buying a home, upgrading to a bigger place, or investing in properties, your borrowing capacity plays a crucial role. Many people find that their ability to secure financing is limited by how much they can borrow, which can be a significant roadblock on the path to achieving financial goals. The good news is that there are several strategies you can implement to increase your borrowing capacity, many of which are often overlooked. Below, I’ve outlined practical tips, from clearing debts to working with brokers, that can help you get closer to securing the property of your dreams or growing your investment portfolio.

1. Pay Off Your HEX or Student Loan

A common factor that can limit your borrowing capacity is the existence of debt, particularly student loans (often called HEX in Australia). While a small balance might seem insignificant, it’s actually your income that affects how much you owe on the loan. The higher your income, the more you’ll be required to pay off your loan. If you have a large HEX debt, paying it off as much as possible can free up more borrowing capacity, because banks view your ability to service that debt as a key determinant in how much more they’ll lend you.

From the bank’s perspective, they factor in your income and repayments when calculating your borrowing potential. So, paying down your loan could increase your available income in the eyes of the lender, making you more eligible for a larger loan.

2. Work with a Good Mortgage Broker

In 2024 and beyond, finding the best mortgage deal and understanding which loan products work best for your situation can be a challenge. This is where a good mortgage broker comes in. Mortgage brokers work with multiple lenders, and they can provide you with better deals than what you might get from just approaching banks directly.

Not only do brokers have access to competitive interest rates, but they can also guide you to the right loan products for your goals. They often have insights into loan policies that could significantly increase your borrowing capacity. For instance, a broker might find a loan product that gives you more favorable servicing terms, which would allow you to borrow more.

Remember, brokers are free to use, so it’s worth reaching out to one to get expert advice on how to approach the loan process.

3. Reduce Your Credit Card Limits

Many people overlook the impact of credit cards on their borrowing capacity. Even if you pay your credit card balances in full every month, the bank will look at your credit card limit as a potential liability. For example, if you have a $10,000 credit card limit, the bank might view that as a $10,000 liability.

To reduce your borrowing capacity, you need to lower the credit limits on your cards. This doesn’t mean you have to cancel your cards, but reducing the available limit can show the bank that you’re managing your debt more responsibly. This simple change can make a significant difference in how much the bank is willing to lend you.

4. Replace Non-Productive Debt with Productive Debt

When managing debt, there’s a difference between productive debt and non-productive debt. Non-productive debt is typically debt that doesn’t generate income, such as a home loan for your primary residence. On the other hand, productive debt is used for investments that generate income, like investment properties.

By replacing non-productive debt with productive debt, such as taking out loans for investment properties, you can increase your borrowing capacity. The reason for this is that banks look at productive debt more favorably because it generates cash flow. This can be especially useful if you’re trying to scale your property portfolio.

A strategy known as debt recycling can help convert non-productive debt into productive debt, allowing you to claim tax deductions and improve your borrowing capacity. However, this strategy should be used carefully, and it’s a good idea to seek professional advice if you want to explore debt recycling.

5. Consider Renting vs. Buying

In times of high interest rates, buying your own home may not always be the best financial move, especially if you are aiming to increase your borrowing capacity. In some cases, renting may be more cost-effective in the short term, freeing up more money that you could use to pay down debt or invest in other assets.

By renting, you can keep your expenses lower, which will enhance your ability to service additional debt. Additionally, renting might allow you to invest in properties that generate income, further boosting your financial standing and borrowing capacity. If you’re thinking about purchasing another investment property, renting could be the key to unlocking additional borrowing power.

6. Invest in the Right Locations

When you decide to invest in real estate, location is key. It’s not just about finding a property you like; it’s about choosing a property in an area with high growth potential. You need to focus on areas where property values are expected to rise, and that offer the best returns on investment.

A common mistake many investors make is buying based on gut feel or emotional attachment to a particular area. Instead, you should make investment decisions based on data, such as historical trends, infrastructure projects, and demographic changes that suggest a location is primed for growth.

If you’re unsure about how to research the best investment locations, it’s wise to outsource this task to professionals who specialize in property investment analysis. A property buyers’ agency can help you make data-driven decisions that will set you up for long-term financial success.

7. Interest Only vs. Principal and Interest Loans

When it comes to structuring your loan, the type of mortgage you choose can have a significant impact on your borrowing capacity. Interest-only loans, while useful for improving cash flow, are often seen as less favorable by banks when calculating your borrowing capacity.

On the other hand, a principal and interest loan may result in higher repayments, but banks are more likely to approve a larger loan because they calculate repayments based on the total loan term (usually 30 years). So, if you’re okay with higher repayments and you’re focused on long-term wealth building, switching to a principal and interest loan could increase your borrowing capacity.

8. Extend Your Loan Term

Extending your loan term is another strategy that can increase your borrowing capacity. If you have a 15-year loan term remaining, the bank may see you as a higher-risk borrower compared to someone with a 30-year loan term. This is because shorter loan terms generally result in higher repayments, which could impact your ability to service other debts.

By extending your loan term to 30 years, your repayments will decrease, which can improve your ability to take on additional loans. While you’ll pay more in interest over the life of the loan, the reduced repayments can give you more flexibility to invest in other properties and increase your overall borrowing capacity.

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