How to Increase Borrowing Capacity? 5 Tips to Boost Borrowing Capacity for Investment Property

Why is My Borrowing Capacity Limited?

With home loan interest rates higher than 6% or even 7%, have you ever looked at your loan application and wondered why you’re not qualifying for as much as you’d like? It can be frustrating, but don’t worry—you’re not alone. The good news is that with the right approach, you can improve your chances of securing a larger loan.

So, what can you do to improve your borrowing capacity? In this blog, we’re sharing five practical tips that’ll help you increase your borrowing power and get you closer to your investing goals. Let’s get started!

Tip 1: Reduce your credit limits

High credit card limits can reduce your borrowing capacity. This is because lenders see the limits as potential liabilities, representing the maximum amount of debt you can access at any time. Lenders factor them into your financial obligations when assessing your ability to repay a loan, regardless of how much you actually borrow.

For example, if you have a $10k limit but a $0 balance, banks still consider the entire $10k as your liabilities. When calculating your monthly serviceability, assuming a 3% minimum monthly payment on the $10k limit will be $300 per month added to your total monthly expenses even though you are not using the card. If your income is $6000/month and your living expenses are $3000/month, banks might consider you only having $2700 left to pay off a loan (= $6000 – $3000 – $300).

To improve your borrowing capacity, review all your credit limits and consider if you can lower or consolidate them.

Tip 2: Extend your loan terms

Extending your loan term is another way to boost your borrowing capacity. When the loan term is extended, the repayment amount is spread over a longer period, thus reducing the monthly amount you have to pay. Let’s break it down with the below example. Assuming:

• Annual income: $95k
• Expected weekly rental income: $500
• Monthly Expenses: $3200
• Home loan amount: $600k
• Interest rate: 5%
• Monthly repayment:
  • 25-year term: $3508/month
  • 30-year term: $3221/month

By extending the term from 25 to 30 years, your monthly repayment drops by $287. This reduction improves your borrowing capacity from $660,600 to $702,500 (a difference of around $41,900).

In some cases, banks may apply a loading, i.e., a buffer, while assessing a borrower’s ability to repay a loan under higher interest rates. For instance, if the current interest rate is 5%, banks may add 3% and assess your repayment capacity at 8%. Higher assessment rates decrease borrowing capacity, but by extending the loan terms, you can offset the impact of loading.

While longer loan terms can improve your borrowing capacity in the short term, they come with higher total interest payments in the long term. Therefore, it’s crucial to balance your ability to manage monthly payments with the long-term interest cost.

Tip 3: Conduct research on different banks’ policies

Each bank has its policies for lending money, which means the outcome can vary depending on which bank you choose. 

For example, banks differ in their assessment rates when assessing your ability to pay. Some may examine at a much higher rate than the current market rate to ensure you can cover your loan when things change, as mentioned in the previous tip.

Banks also look at your income differently. Some will accept a year’s worth of bonuses or commissions, while others may want two years of consistency. Some banks take a more conservative approach, like a technique called “shading”, to account for potential fluctuations. This approach involves considering only a portion of certain types of income, like bonus or rental income. For example, you made $20k in bonus this year, and some banks might only factor in 80% of that income (equal to $16k)  to safeguard against potential future uncertainties.

There are also differences among banks when they examine your debts. Some will base your borrowing capacity on your interest-only repayment, typically much lower than a principal-and-interest repayment. This can significantly boost your borrowing power. Others will factor in a future shift to principal and interest payments, cutting your borrowing capacity by using your P&I repayment amount over 25 years (since the interest-only period ends in five years) in their calculation.

Some banks offer better rates, others lower fees, but if you aim to build a scalable portfolio, focusing on borrowing capacity and appropriate buffers should be your priority.

Tip 4: Strategically leverage your potential rental income

Let’s say you have a borrowing capacity of $800k and take out a $600k loan. You might think you are left with only $200k, which can do nothing. However, there’s a big missed opportunity.

When you approach the bank for a new loan, they’ll look at three key things:

• The overall gearing of your current investment property(ies).
• The proposed rental income for your next property(ies).
• The gearing of your next property(ies) purchase.

Rather than just lending you $200k, the bank will calculate a new borrowing capacity figure based on the above three factors. It could be $300k, $350k, or even more. It’s not a guaranteed amount, as each bank looks at your debt and income differently, but it’ll be effectively larger than what’s left from the last borrowing. 

So don’t get stuck thinking that leftover $200k is useless, as your next property’s rental income can unlock more borrowing capacity. Next time, ask your mortgage broker, “I’ve got $200k left after my last purchase. If I want to buy a $X property and expect a $Y rent, how much could I borrow?” A good broker will help you test different rental yield scenarios with the bank, which can help you determine the right yield target to secure the next property.

Tip 5: Increase your income while reducing your expenses

Last but not least, nothing impacts your borrowing power more than improving your income and cutting back on expenses. Lenders assess your financial health by examining your debt-to-income ratio and overall stability. Boosting your income —whether through a raise, side hustles, or changing jobs—can make a big difference.

On the flip side, lowering your expenses is just as important. Paying off debts like credit cards, car loans, or personal loans, along with trimming unnecessary spending, will improve your financial profile. When lenders see that you’re earning more and spending less, they’re more likely to approve a higher loan amount because they see you as less risky.

The key is to balance growing your income and cutting your expenses. This combination can unlock a higher borrowing capacity, helping you access the funds you need for your next property plan.

To put it simply, here are five key tips to help improve your borrowing capacity:

1. Reduce or consolidate your credit card limits to lower your financial liabilities.
2. Extend your loan term to make repayments more manageable.
3. Research different banks’ policies to find the best fit for your needs.
4. Strategically leverage rental income from your next purchase to strengthen your application.
5. Increase your income and control your expenses to improve your financial profile.

This blog is inspired by our InvestorKit podcast episode, “5 Tips to Improve Your Borrowing Capacity”. Don’t miss this episode if you’re serious about maximising your borrowing power. Tune in now by clicking here!

InvestorKit is a data-driven buyers agency dedicated to helping property investors not only identify and invest in the most suitable markets to their needs and scale up their portfolio faster, but also utilise financial tools strategically to unlock more opportunities.  Would you like to speed up your portfolio-building process like a pro? Get in touch today for a free, no-obligation 15-minute discovery call!