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Understanding Your Borrowing Capacity and How To Maximise It

We generally think about our borrowing capacity in terms of buying property – the higher your borrowing capacity, the more you can borrow. Sounds pretty simple.

But your borrowing capacity isn't just important for taking out a mortgage. Whenever you apply for credit, whether it's a personal loan, car loan or credit card, the credit provider will assess your borrowing capacity.

What do you mean by "borrowing capacity"?

Your borrowing capacity, sometimes referred to as 'borrowing power', is the amount of money a credit provider can lend to you. When you apply for credit, the lender will assess your whole financial situation to determine how much you can borrow, how much you're likely to pay back each month, for how long and at what rate. Every credit provider has a slightly different method for determining your borrowing capacity, but it helps to understand the process before getting started.

What factors impact your borrowing capacity?

Various factors determine your borrowing capacity, and they can differ from lender to lender. One major factor that is entirely out of your control is the lender's appetite for risk, which is why you may be offered a vastly different deal from one lender to another. These details will usually be outlined in the lender’s credit policy. Another one is the number of dependents in your care – again, something you can't do much about.

However, there are several key areas that a credit provider will look at when assessing your application – and these you do have a level of control over. They include:

  • Income and assets

  • Liabilities

  • Living expenses

  • Number of applicants

  • Credit history

How do I increase my borrowing capacity?

You can employ several tactics that might help increase your borrowing capacity. They're also smart money moves in their own right.

Money in vs money out

We're not talking about salary here. We're talking about what's leftover at the end of the pay cycle. If you've grown accustomed to a certain lifestyle that brings you back to net-zero before every paycheque, you may have trouble accessing higher amounts of credit.

You might be on a stellar salary, but if you regularly reach the end of a pay cycle with only a few bucks in the bank, a credit provider may question your ability to service a loan.

Our advice? Rein it in, friend. Ensure you're living within your means and can demonstrate you have enough surplus cash available to meet your potential credit repayments.

Reduce your credit card limit

Even if you have a $0 balance, a credit provider will assess your borrowing capacity on the assumption that you've spent 100% of the card limit. So if your card limit is $10,000, you'll be assessed for every dollar of it. Simply having access to a large amount of money limits your borrowing capacity, even if you have no intention of spending it. So, reduce your credit limit and you’ll likely increase your borrowing power.

Cancel unused credit cards

If you have a credit card you don't use regularly, consider cancelling it. The same above points apply. Even if you have an old card you haven't used in months, potential credit providers will assess your application based on a 100% utilisation rate.

For some people, a credit card can provide peace of mind, giving you access to funds if you need them. If you can, build up your emergency fund and ditch that credit card.

Reduce your debt

You may have heard about a situation where a homebuyer is advised to use their deposit to pay off their car loan to increase their borrowing capacity. Reducing debt is often prioritised over having a huge sum of money in the bank. Reducing your debts and liabilities is always a smart move, especially when trying to obtain credit.

If you have a significant amount of savings stashed away, consider using it to reduce any high-interest debts you already have before applying to obtain another.

Alternatively, you can chip away at your debt with our handy round up tool. Wisr App helps you round up your everyday purchases to pay a little extra directly off your debts each month. It's simple yet effective, and those small amounts really do add up!

Increase your income

Sometimes, the easiest way to increase your income is simply to ask for more money. This won't work for everyone in every role, but if you work in an industry that doesn't have incremental pay rises each year, consider chatting with your boss about getting a pay bump. We've written a blog post on navigating that tricky conversation – read it here.

You might also consider getting a part-time job or doing some freelancing. Don't be fooled by the common myth that you'll be taxed more for your second income. Your total income for the financial year is combined and assessed at the same rate. Earning more may simply push you into a higher tax bracket overall. 

The same goes for side hustles. Just make sure you're declaring any additional income you receive.

Consider a joint loan

“A problem shared is a problem halved.” The same goes for a joint loan. In most cases, both parties are equally responsible for repaying the loan. Happy days. But what does this mean for your borrowing capacity? Simply put, it gives it a nice boost. As long as both applicants are in good financial standing, applying for a joint loan can help you access higher amounts of credit.

If you're considering taking out a joint loan, here's a quick rundown of what you need to know first: Things to know before applying for a joint personal loan

Review your credit reports

At the risk of sounding like a broken record, it is SO important to stay on top of your credit scores. They play an important role in determining the kind of deal a credit provider will offer you. 

If your scores aren't looking crash hot and you're not in a rush to obtain credit, consider waiting a few months for it to bounce back. There are plenty of ways to improve your credit scores – we've written about them here. 

Checking your credit reports regularly also gives you a better chance of spotting any errors that might hinder your scores.

Did you find this content helpful?

Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Services does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.

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