5 factors that shape your borrowing capacity

Your borrowing capacity depends on more than your income. Interest rates, lender policies, existing debts and living expenses all play a role in determining how much you may be able to borrow. Any one of these can shift your borrowing power, even when your salary stays exactly the same.

Here are five of the main reasons your borrowing capacity can change.

1. Interest rate changes

When the Reserve Bank moves the official cash rate, banks pass on all or most of the change to consumers. This directly affects the interest rates on offer for new loans. A rate increase reduces the loan amount you can comfortably service. A rate decrease means you can service a larger mortgage. Your salary does not need to change for either of these outcomes to occur.

2. Loan serviceability buffers

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) enforce strict limits on how much lenders can approve. This protects borrowers from taking on more debt than they can manage.

Currently, lenders apply a 3% minimum serviceability buffer above the mortgage interest rate on offer. This acts as a contingency for future rate rises. There is also a debt-to-income ratio cap. Lenders must assess both your income and expenses, using either your declared living expenses or the Household Expenditure Measure (HEM) benchmark, whichever is greater.

If regulators or lenders increase this buffer, your borrowing capacity falls. Reducing the buffer can increase the amount you are eligible to borrow.

3. Lender policy changes

Banks review their own lending policies on a regular basis. These reviews cover how lenders treat overtime, bonuses and commission income. They also cover the assessment of rental income and guidelines around investment properties or interest-only loans. Any of these policy shifts can affect your borrowing capacity, even when your salary and the lender’s interest rates have not moved.

4. Your existing debts

Credit cards, personal loans, car finance and Buy Now Pay Later accounts all reduce the income available to service a mortgage. A credit card with a high limit can reduce your borrowing capacity even when you carry no balance. Lenders may assume you could draw on that limit in full at any time.

5. Changes in your household expenses

Higher living expenses since your last loan assessment can reduce the amount a lender is willing to approve. Childcare costs, school fees and new insurance policies are common examples. Altered family circumstances, such as a new child or taking financial responsibility for other dependants, can also affect your approved loan amount.

Get help to review your borrowing capacity

Lending rules, interest rates and credit policies change regularly. A borrowing estimate from six or twelve months ago may no longer be accurate. Speaking with your financial adviser is a good starting point for understanding the factors at play in your situation.

Your adviser can also connect you with a mortgage broker. A broker compares the lending policies of multiple credit providers and identifies those whose criteria best suit your financial circumstances. This can improve your borrowing options without any change to your income.

We offer licensed financial advice to help you make the right choices about your borrowing capacity. If you’d like to talk through your situation or understand your next steps, introduce yourself.