Your borrowing capacity is the amount a bank will lend you to buy a home. It’s based on factors like your income, how much deposit you’ve saved, other existing debts, and your living expenses.
Check your current commitments
Lenders will generally look at your monthly living expenses, the limit on your credit card (not just the accumulated debt), and your credit history, which shows how well you’ve managed debt in the past.
Take a critical look at what you’re spending
Lenders look very closely at your actual living costs, not just averages for people like you. You should prepare to show you have household costs under control.
Decrease – or ditch – your credit card
Even if you’ve paid off your credit card balance, lenders will look at the limit, not what’s outstanding. That’s because you could rack up the whole debt after the home loan contracts are signed.
If you’re not ready to let your card go entirely, think about contacting your issuer to have the card limit reduced. The smaller the limit, the lower the risk to your home loan lender.
Cut back other debt before applying
Lots of Australians are carrying some personal debt like car finance or a personal loan. If you’re wondering, should I cut back debt before applying for a home loan? The answer is: yes. Paying down these balances can boost your borrowing limit. Lenders like to know you can comfortably handle all your financial commitments, and if you’re starting with a clean slate, your loan application is more likely to get a thumbs up.