Common Borrowing Capacity Mistakes and How to Avoid Them

Your borrowing capacity is the most a lender will assess you for, and it is often lower than people expect. The reason is that lenders test your repayments at a higher rate than the one you will actually pay. Knowing that before you apply lets you fix the right things first.

For buyers in Koo Wee Rup, that means working out your real number before you fall for a property, not after. Our Koo Wee Rup mortgage broker team sees the same avoidable errors come up again and again.

How Is Borrowing Capacity Calculated?

Lenders work out your borrowing capacity by taking your income, subtracting your living expenses and existing debts, and checking whether you could still afford repayments on the loan amount at a stressed interest rate. Each lender applies its own methods, so the same household can get different results from different lenders.

Income is only one input. Your living costs, dependants, credit card limits, HECS-HELP or other debts, and the loan term all change the result. A borrowing capacity assessment brings these together so you see a realistic figure rather than a rough online estimate.

Why the Assessment Rate Matters More Than Your Actual Rate

Banks and other APRA-regulated lenders must test your repayments at a rate at least 3 percentage points above the loan rate, so the number you are assessed on is higher than your real repayment. Other lenders may use different buffers.

Here is what that looks like using an illustrative rate of 6.75% p.a. on a principal and interest loan over 30 years. Per $100,000 borrowed, the repayment is about $649 a month. Assessed at 9.75% (the illustrative rate plus 3 percentage points), the same $100,000 is tested at about $859 a month, roughly 32% higher.

Those figures are examples only. Actual rates vary with your deposit size, loan features and lender, so use a repayment calculator, or ask us to run the numbers, when calculating home loan repayments for your own situation.

Common Mistakes That Shrink Your Borrowing Capacity

The most common mistakes are leaving unused credit card limits open, guessing at living expenses, and applying before sorting out existing debts. Each one can lower the amount a lender will assess you for, and each can usually be addressed before you apply.

As an example, consider a couple in Koo Wee Rup who want a loan of $450,000. At the illustrative 6.75% over 30 years, repayments would be about $2,919 a month. A lender tests that same loan at about $3,866 a month, which is around $947 higher.

Their first assessment comes up short. They hold two rarely used credit cards, and lenders generally treat card limits as a debt whether or not the card is used. Their estimated living costs were also lower than their bank statements showed.

Their broker has them close one card and reduce the limit on the other. They also rework the expense figures from real statements. The cleaned-up application shows lower commitments and honest expenses, and the couple proceed to a home loan pre-approval at their target amount with a budget they can sustain. The trade-off is less spare credit for emergencies, so they keep a cash buffer instead.

This is illustrative only. The result in your case depends on your lender and your full financial position.

Does a Bigger Deposit Improve Borrowing Capacity?

A bigger deposit reduces the amount you need to borrow and lowers your loan to value ratio (LVR), but it does not lift the income-based amount a lender will assess you for. What it can do is reduce or avoid Lenders Mortgage Insurance (LMI), which lenders usually charge when the deposit is small, depending on the lender and the loan.

The trade-off is liquidity. Putting every dollar into the deposit leaves nothing for moving costs, repairs or a rate rise. Some buyers hold part of their savings in an offset account linked to the loan, which reduces the interest charged while keeping the money accessible. Offset loans can carry a higher rate or a package fee, so we compare the extra cost against the interest you would save.

If this is your first purchase, our first home buyers page covers the options for getting started, and we can match a first home loan to your deposit and income.

Why Pre-Approval Is a Starting Point, Not a Promise

Home loan pre-approval tells you the amount a lender is likely to lend, subject to conditions, and it can change if your income, debts or the lender's policy change before you sign a contract. It is a strong guide for house hunting, but the final decision comes after the lender values the property and reviews your documents.

For that reason, avoid taking on new finance, such as a car loan or buy now pay later account, between pre-approval and settlement. Any new commitment can reduce your capacity and put the approval at risk. Our home loans page explains the loan types we can compare for you, including variable, fixed and split rate structures.

If you already own, a loan health check can show whether your existing loan still suits you before you borrow again.

Call one of our team or book an appointment at a time that works for you. We will calculate your borrowing capacity with you, fix what can be fixed, and compare lenders across Australia before you make an offer.

Frequently Asked Questions