How to Improve Your Borrowing Power Before You Apply for a Home Loan

20/4/2026

Your borrowing power determines how much a lender will let you borrow, and it is almost certainly lower than you expect. Here are the practical steps you can take to maximise it before you lodge an application.

Borrowing power is the maximum amount a lender will approve you to borrow, based on their assessment of your income, expenses, existing debts and financial commitments. It is not a fixed number. It varies between lenders (sometimes dramatically), and it can change based on decisions you make before you apply.

Most borrowers are surprised to learn that their borrowing capacity is lower than they assumed. In a rate environment where the RBA cash rate sits at 4.10% and lenders stress-test your repayments at approximately 3% above the actual rate, the serviceability hurdle is significant. A borrower assessed at an effective rate of 7% or higher needs substantially more income to service the same loan than they would have at lower rates.

The good news is that there are concrete, practical steps you can take to improve your borrowing power before you apply.

How Lenders Calculate Your Borrowing Power

Every lender uses a serviceability model that compares your assessed income against your assessed expenses and commitments. The loan amount they will approve is the maximum where the resulting repayments (calculated at the stress-test rate) still fall within their acceptable limits.

The key inputs are:

Income: Your gross income from all sources, assessed according to the lender's policies. Different lenders treat different income types differently, which is why borrowing power varies between lenders.

Existing debts: Every existing debt reduces your borrowing power. This includes mortgage repayments, personal loans, car loans, HECS-HELP, and credit card limits.

Living expenses: Lenders use either the Household Expenditure Measure (HEM) benchmark or your declared living expenses, whichever is higher. If your actual expenses are high, they will use your actual figures.

Dependants: Each dependant reduces your assessed surplus income.

Stress-test buffer: Lenders add approximately 3% to the product rate when modelling your repayments. This means they assess your ability to repay at a rate significantly higher than the rate you will actually pay.

Understanding these inputs reveals the levers you can pull.

1. Reduce or Close Unused Credit Facilities

This is the single most impactful step most borrowers can take.

Lenders assess credit card limits at their full value, not the outstanding balance. If you have a credit card with a $15,000 limit and a $500 balance, the lender assumes you could draw the full $15,000 at any time and calculates the repayments on that amount.

A $15,000 credit card limit can reduce your borrowing power by $50,000 to $70,000 depending on the lender. If you have two cards with combined limits of $25,000, the impact can exceed $100,000.

What to do: Close any credit cards you do not genuinely need. Reduce the limits on cards you want to keep. Do this well before you apply, ideally at least one to two statement cycles ahead, so the changes are reflected in your credit file.

The same principle applies to buy-now-pay-later accounts, personal lines of credit, and any facility where you have an approved limit.

2. Pay Down Existing Debts

Every existing debt repayment reduces the amount available for mortgage servicing. Personal loans, car loans and HECS-HELP all eat into your borrowing capacity.

Car loans and personal loans: These typically carry higher interest rates and shorter terms than mortgages, which means the repayments are proportionally larger. Paying off a $20,000 car loan before applying can add $60,000 or more to your borrowing power.

HECS-HELP: This is assessed as a percentage of your income (not a fixed repayment), so it reduces your assessed income rather than adding a fixed expense. The impact depends on your income level and the lender's assessment method.

Buy-now-pay-later: Some lenders now assess BNPL commitments in their serviceability models. If you have active BNPL accounts, consider clearing and closing them before your application.

3. Increase Your Assessable Income

Some income is fully assessable by lenders; other income is discounted or excluded. Understanding the difference can help you maximise what lenders count.

Overtime and bonuses: Most lenders will only include overtime and bonus income if it has been consistent over two years. If you have been receiving regular overtime, ensure your payslips and tax returns clearly reflect this history.

Rental income: If you own an investment property, rental income is typically assessed at 80% of the gross amount. Ensuring your rent is at market rates and documented through a property manager strengthens this income line.

Second jobs or side income: Lenders generally want to see at least 12 months of consistent secondary income before they include it. If you have a regular side income, ensure it is declared on your tax returns.

Self-employed income: The way self-employed income is assessed varies enormously between lenders. Some require two years of tax returns, others accept one year, and some non-bank lenders accept BAS statements or accountant declarations. Choosing the right lender for your income type is one of the most significant variables in self-employed borrowing power.

4. Reduce Your Declared Living Expenses

Lenders are required to use realistic living expense figures. If your declared expenses are high, they reduce your assessed surplus and therefore your borrowing power.

This is not about understating your expenses (lenders verify them, and inaccuracy can void your application). It is about genuinely reviewing and reducing discretionary spending in the months before you apply.

Subscription services, dining out, entertainment, clothing and holidays all flow through your bank statements. Lenders review three months of transaction history. A pattern of high discretionary spending in that period can reduce your assessed borrowing capacity.

What to do: Three to six months before you plan to apply, review your spending and cut any unnecessary subscriptions or discretionary costs. This is not about living like a monk forever; it is about presenting clean, sensible bank statements during the assessment window.

5. Choose the Right Lender

This is where a mortgage broker adds the most value. Different lenders use different serviceability models, treat different income types differently, and arrive at different borrowing capacities for the same borrower.

The variation can be substantial. Two major banks looking at the same borrower with the same income and expenses can arrive at borrowing capacities that differ by $50,000 to $150,000.

A broker who compares 35+ lenders can identify which lender gives you the highest borrowing power for your specific income type, expense profile and property choice. This is not about gaming the system; it is about being assessed by a lender whose policies are the best fit for your financial profile.

6. Consider a Longer Loan Term

A 30-year loan has lower minimum repayments than a 25-year loan on the same amount at the same rate. Lower repayments mean you pass the serviceability test at a higher loan amount.

This does not mean you have to take 30 years to pay the loan off. You can always make extra repayments to shorten the term. But choosing a longer term at application increases the amount you can borrow.

7. Apply Jointly if Possible

Two incomes are almost always better than one for serviceability purposes. If you have a partner who earns income, applying jointly will typically increase your borrowing power significantly, even if one income is much smaller than the other.

8. Address Your Credit File

Your credit report records your borrowing and repayment history. Late payments, defaults, or multiple credit enquiries in a short period can all affect how lenders assess your application.

Before you apply, obtain a copy of your credit report (free from Equifax, Illion or Experian) and check for:

  • Errors or outdated information

  • Defaults you were not aware of

  • Multiple credit enquiries from shopping around for finance

If there are issues on your file, a broker can advise on whether they need to be resolved before you apply and which lenders are more flexible on credit history.

What Not to Do Before Applying

Do not take on new debt. A new car loan, personal loan or credit card application in the months before your home loan application will reduce your borrowing power and create a new enquiry on your credit file.

Do not change jobs if you can avoid it. Lenders prefer stable employment. Changing jobs just before an application can create complications, particularly if you move from permanent to casual or contract employment.

Do not make large unexplained cash deposits. Lenders review your bank statements and will query any large deposits that are not clearly sourced. Gifts from family members are acceptable but need to be documented.

Get a Clear Picture Before You Start

The most valuable step you can take is to understand your borrowing power before you start looking at properties. There is no point falling in love with a $700,000 property if your borrowing capacity is $550,000.

This article is general information only and does not constitute financial advice. Your personal circumstances may differ. Lender Edge, Credit Representative Number 574076, is an Authorised Credit Representative of Astute Financial Management Pty Ltd, Australian Credit Licence 364253.