Tips to improve your borrowing capacity


When it comes to borrowing for a car, boat, home or perhaps your business the lender will always assess your serviceability; your ability to repay the loan. This is part of their risk assessment. It is the calculation the Lender conducts on your income to expenses, to determine how much you can borrow.

A number of buffers are incorporated into these calculations by the Lenders, and they are used to ensure you can comfortably afford your repayment. But these buffers are adaptable to your circumstances, to increase the amount you can borrow. Below we consider some of the ways you can improve your borrowing capacity:

Reduce credit card limits

If you have a credit card/s with large limits that you do not use, then consider reducing these or even cancelling the cards if you do not use them. Credit card limits are (currently) assessed at 3.8% of their limit on a monthly basis. For example, if you have a credit card limit of $ 15,000.00, the lender will apply a repayment of $ 570 per month. This could have a substantial bearing on your borrowing capacity.

Longer loan term

When calculating how much you can borrow, Lenders will often use the actual repayment for the new loan and your existing loans. By financing your purchase over 7 years (let’s say compared to 5 years) then it will improve your borrowing capacity as the repayments will be lower over the longer period.

Repay smaller loans

If you have an existing loan with a small balance and/or only a short period left on the loan, then you could pay this out completely with your savings. Any deposit you intended for the new purchase, could be reallocated to repay an existing loan. For example, let’s assume you have a 3-year-old loan that has $ 5000 owing, and the repayments are $ 550 per month. By repaying this loan with savings it will increase your borrowing capacity by $ 550 per month, which could equate to approximately $ 25,000.00 in borrowings. Consequently, improving your borrowing capacity by $ 20,000.00.

Residual Value

A residual value is often used by business operators to reduce the repayments on their business purchases, improving cash flow. The same principle can be applied to consumers or non-business borrowers. If you would like to borrow more, consider the option of a Residual Value. They help reduce your repayment for the term of the loan and improve your borrowing capacity.

A Residual Value is a lump sum payment at the end of the loan and can usually be taken on loans up to 5 years (not eligible for loan terms of 6 and 7 years). When this falls due you can pay it out with savings, refinance the loan over 2-3 years or trade your vehicle in and upgrade.

Refinance your existing loan/s

Refinancing an existing loan over a longer period and/or at a lower interest rate, will reduce the repayment and help improve your borrowing capacity. This option wouldn’t be recommended unless there is a clear financial benefit in doing so. and you can read more on the pros and cons in our blog.

Consolidate your loans

If you have several loans and/or credit cards that are making it difficult for you to budget, consider consolidating them in to one easy to manage loan repayment. A lender may be able to offer you a lower interest rate on the total debt and this will help in reducing your overall monthly outgoings. By reducing your outgoings, it may help in borrowing the additional funds you need for your new purchase.

Reduce your living expenses

Lenders will always ask you to declare your monthly living expenses before you apply for a loan. They use their own internal benchmarks (generally based off HEM) however if your declared expenses are higher, they will use these; which can inhibit your borrowing capacity, Consider reducing your expenses so the new loan is more affordable or it could allow you to borrow the extra that you need. Discretionary items such as recreation and entertainment are areas where you may be able to cut back.

The team at are always available to answer your questions and guide you through the process of adjusting your financial commitments. Learn more by contacting us on 08 9304 2010 or contact us online.

The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred because of reliance upon it – please make your own enquiries.

Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.

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