Borrowing Capacity Guide
How to Improve Your Borrowing Capacity Before Applying for Finance
Whether you are applying for a car loan, business finance, boat loan or home lending, lenders will assess your ability to comfortably repay the loan. Understanding how borrowing capacity works can help you better prepare before applying.
Quick Takeaways
- Lenders assess income, expenses and existing debts when calculating borrowing capacity.
- Credit card limits can significantly reduce borrowing power.
- Longer loan terms may improve affordability calculations.
- Refinancing or consolidating debt can sometimes improve serviceability.
- Living expenses are a major part of lender assessment.
- Residual values can reduce repayments in some situations.
What Is Borrowing Capacity?
Borrowing capacity refers to the amount a lender believes you can reasonably afford to repay based on your financial position.
Lenders generally assess:
- income
- existing debts
- living expenses
- credit commitments
- employment stability
- financial conduct
Different lenders use different servicing models and risk assessment policies.
Serviceability Is a Core Lending Requirement
Responsible lending obligations require lenders to assess whether a borrower can comfortably afford the proposed repayments.
To do this, lenders apply servicing calculations and affordability buffers designed to account for:
- interest rate movements
- existing commitments
- living expenses
- future financial stress scenarios
These calculations vary between lenders and loan types.
Reduce Unused Credit Card Limits
One of the most overlooked borrowing capacity factors is unused credit card limits.
Even if the balance is low or unused, lenders often assess repayments based on the approved limit rather than the current balance.
For example:
- $15,000 limit
- assessment rate applied monthly
- reduces available borrowing capacity
Reducing or cancelling unused cards may improve servicing outcomes.
Longer Loan Terms Can Reduce Repayments
Extending the loan term generally reduces the monthly repayment amount, which may improve borrowing capacity calculations.
For example:
However, longer terms may also increase the total interest paid over the life of the loan.
Repaying Smaller Existing Loans
Existing loan repayments directly affect lender servicing calculations.
Paying out smaller debts may improve monthly affordability and increase borrowing capacity.
Examples may include:
- small personal loans
- credit cards
- consumer finance contracts
- short-term liabilities
Reducing ongoing commitments may sometimes have a significant impact on serviceability outcomes.
What Is a Residual Value?
A residual value (also known as a balloon payment) is a lump sum remaining at the end of the loan term.
Because part of the balance is deferred until the end of the loan, repayments during the term are generally lower.
This may improve borrowing capacity calculations in some situations.
How Residual Values Work
Residual values are commonly used in:
At the end of the term, borrowers may:
- pay the residual from savings
- refinance the residual
- trade the vehicle
- sell the asset
Residual structures are not available on all loan terms or products.
Refinancing Existing Loans
Refinancing may help improve serviceability if:
- interest rates are reduced
- loan terms are extended
- multiple debts are simplified
- monthly repayments decrease
However, refinancing should always be assessed carefully, particularly where extending loan terms may increase long-term interest costs.
Debt Consolidation
Some borrowers choose to consolidate multiple debts into one repayment structure.
This may potentially:
- simplify budgeting
- reduce monthly repayments
- improve cash flow
- improve servicing calculations
The suitability of consolidation depends on the borrower’s overall financial situation and long-term objectives.
Living Expenses Matter More Than Many Realise
Lenders assess declared living expenses as part of every finance application.
This may include:
- food and groceries
- utilities
- insurance
- entertainment
- subscriptions
- childcare and schooling
- transport costs
Many lenders also compare declared expenses against internal benchmarks such as HEM (Household Expenditure Measure).
Reducing Expenses May Improve Affordability
Reducing discretionary spending may improve overall serviceability.
Common areas borrowers review include:
Strong recent bank statement conduct may also improve lender confidence.
Different Lenders Assess Capacity Differently
Not all lenders use identical servicing models.
Differences may include:
- assessment rates
- living expense treatment
- credit card calculations
- income shading policies
- residual value acceptance
- business income assessment
This is one reason borrowers sometimes compare multiple lenders before proceeding.
Ways to Improve Borrowing Capacity
- Reduce unused credit card limits
- Repay smaller existing debts
- Review living expenses carefully
- Consider refinancing options
- Consolidate multiple debts where appropriate
- Use realistic borrowing levels
- Consider longer loan terms carefully
- Maintain strong bank statement conduct
Final Thoughts
Borrowing capacity is influenced by far more than income alone.
Existing commitments, living expenses, loan structures and lender servicing models all play an important role in determining affordability.
Understanding these factors before applying may help borrowers better position themselves and avoid unnecessary application issues.
Frequently Asked Questions
What affects borrowing capacity the most?
Income, existing debts, living expenses and credit commitments are major factors in lender servicing calculations.
Do unused credit cards affect borrowing power?
Yes. Lenders often assess repayments based on the approved limit, even if the card is unused.
Can refinancing improve borrowing capacity?
Potentially. Lower repayments or extended terms may improve servicing outcomes in some situations.
What is a residual value?
A residual value is a lump sum payable at the end of the loan term that reduces repayments during the loan.
Do living expenses matter?
Yes. Lenders carefully assess declared expenses and often compare them to internal benchmarks.
Do all lenders calculate serviceability the same way?
No. Different lenders use different servicing models and affordability policies.
Need Help Understanding Your Borrowing Position?
Yes Approved Finance can help compare lender servicing policies and explain different finance structures based on your borrowing goals and financial position.
Compare Finance OptionsGeneral information only. Finance is subject to lender assessment, eligibility criteria and approval.