How lenders work it out
A lender takes your income, subtracts your living expenses and your existing commitments, and works out how large a repayment the remainder can support. It then tests that repayment at a higher interest rate than the real one, as a buffer. The prudential regulator, APRA, currently expects banks to add at least three percentage points. Each lender then applies its own policies, which is why capacity can differ between lenders for the same person.
What moves it most, in rough order
- Existing home and investment loans. They are assessed at the buffered rate, and often over the remaining term.
- Credit cards. Lenders assume the card is fully drawn and assess a monthly repayment on the limit. Reducing a limit you do not use is one of the quickest ways to lift capacity.
- Car loans and personal loans. Short terms mean large monthly repayments.
- Buy now pay later accounts and store finance.
- Student debt. Compulsory repayments reduce the income a lender counts.
- Dependants. Each one increases the living expenses a lender assumes.
- Living expenses. Lenders use the higher of what you declare and a benchmark for a household like yours.
- Income type. Overtime, bonuses, commission and self employed income are often counted at less than full value, or need a two year history.
What works in your favour
- Expected rent from the new property counts, though usually at a reduced percentage to allow for vacancy and costs.
- Some lenders include the tax effect of an investment loan in their assessment.
- A second income on the application.
- Lower commitments at the time you apply.
Before you apply
- Close or reduce credit card limits you do not use.
- Pay out small debts if you are able to.
- Avoid taking on new credit.
- Keep your spending steady for at least three months. Lenders read statements.
- Gather payslips, tax returns and statements, so the assessment is based on documents and not on estimates.
Why we ask about this first
The borrowing ceiling decides which areas are worth looking at, which is the point of starting with the number and not the suburb. An indicative conversation about capacity involves no credit check. The formal assessment is carried out by a licensed broker, not by us.