How to Increase Borrowing Capacity— Strategies to Maximise Your Property Budget, Refinance, Access Equity & Grow Wealth with Smart Spending (Ep. 304)

Show Notes – How to Increase Borrowing Capacity

Cate and Dave unpack one of the most sought-after topics in property finance: how to increase borrowing capacity—a must-listen for homebuyers, investors, and anyone navigating the lending landscape.

How Lenders Calculate Borrowing Capacity

• Income Assessment: Lenders evaluate different income types—salary, bonuses, rental income, etc.—but often apply “shading” (reductions) to non-base income.
• Complex Income Scenarios: Many borrowers have variable income structures, and online calculators rarely account for this nuance.

The Impact of Existing Debts

• Home loans, credit cards, personal and car loans, HECS/HELP, and even child support all impact serviceability.
• Lenders use an assessment rate (typically 3% above your actual rate) to ensure affordability if interest rates rise.

The Role of Lender Policy

• Every lender has unique borrowing rules. Strategic mortgage brokers understand how to work within these policies to optimise outcomes.
• Policy interpretation is critical—some lenders are more lenient with certain incomes, professions, or property types.

Living Expenses: Then vs. Now

• A major shift in lending occurred post-2018 following the Banking Royal Commission.
• Borrowers must now detail their expenses across 15 categories, supported by 3–6 months of bank statements.
• Lenders may use automated expense tracking tools to analyse your spending.

Understanding Expense Categories

• Primary (Non-Discretionary): Groceries, utilities, transport, rent, etc.
• Discretionary: Entertainment, memberships, private school fees, health insurance, etc.
• These details are vital in determining borrowing capacity—even if you can reduce them.

The Role of HEM (Household Expenditure Measure)

• HEM is still a benchmark, but it’s no longer the sole basis for expense assessment.
• If your declared expenses are:
  • Higher than HEM: Your figures are used, reducing borrowing power.
  • Lower than HEM: Some lenders may still apply the benchmark unless evidence supports your claim.

The Real Impact of Reducing Living Expenses

• Reducing discretionary spending can boost your borrowing power by tens or hundreds of thousands of dollars.
• Case studies:

Single earning $150K

• Owner Occ purchase
• No dependents
• No debts
• Major bank
• 80% LVR

Couple earning Combined $300K (50/50 each)

• Owner Occ purchase
• No dependents
• No debts
• Major lender
• 80% LVR

Tips on Reducing Living Expenses

• Be Realistic: Don’t over-cut—maintain a lifestyle you can sustain.
• Audit Your Finances: Review 3–12 months of spending.
• Focus on Discretionary Areas: Dining out, subscriptions, entertainment are low-hanging fruit.