Your borrowing capacity determines how much a lender will approve you for, and in Augusta's tightly held property market, even a modest increase can mean the difference between securing a home and missing out.
Lenders assess your borrowing capacity by comparing your income against your expenses and existing debts. They apply a buffer rate above current interest rates to ensure you can manage repayments if rates rise. The calculation looks at your net income after tax, subtracts your living expenses, credit commitments, and applies a serviceability test. What remains determines your maximum loan amount. Most lenders also consider your deposit size and the loan to value ratio, as a larger deposit reduces their risk and can increase what they're willing to lend.
How closing a credit card affects what you can borrow
Closing unused credit cards before you apply for a home loan can add tens of thousands to your borrowing capacity. Lenders assess the full limit of every card you hold, not just what you owe. Even if your card has a zero balance, a $10,000 limit might reduce your borrowing capacity by $50,000 or more, depending on your income and other commitments.
Consider a couple looking to buy in Augusta who each held a credit card with a $15,000 limit. They rarely used either card and carried no debt. Before applying for pre-approval, they closed both accounts and obtained closure letters from the card providers. That single step increased their borrowing capacity by close to $120,000, which moved them from looking at units to being able to consider established homes closer to the town centre.
If you need a card for everyday spending, reduce the limit to the lowest amount that works for you. A $2,000 limit has far less impact on your serviceability than a $20,000 one. Lenders need to see the closure or reduction reflected on your credit file, so allow a month between making the change and submitting your home loan application.
Paying down personal loans and car finance
Personal loans and car finance reduce your borrowing capacity dollar for dollar. Lenders factor in the minimum monthly repayment across the remaining term, which can significantly limit how much they'll approve. If you're carrying a car loan with 18 months left and repayments of $600 per month, that commitment might reduce your home loan capacity by $80,000 to $100,000, depending on the lender's assessment rate.
If you have savings set aside for a deposit, it can sometimes make sense to use part of that buffer to clear shorter-term debts before you apply. The increase in borrowing capacity often outweighs the temporary reduction in your deposit, particularly if you're still able to meet the lender's minimum deposit requirement and avoid Lenders Mortgage Insurance.
Ready to get started?
Book a chat with a Mortgage Broker at Dunn Bay Home Loans & Finance today.
In Augusta, where rental supply is limited and many buyers are looking to secure their first home or downsize into the region, improving your serviceability before you apply can mean the difference between a conditional approval and a decline. Lenders want to see a clear picture of your financial position, and reducing your ongoing commitments gives them confidence you can manage the loan over the long term.
Switching from interest only to principal and interest
If you hold an existing investment loan on an interest only structure, switching to principal and interest repayments can improve your borrowing capacity for an owner occupied home loan. Lenders assess interest only loans more conservatively because the repayment amount jumps when the interest only period ends. By moving to principal and interest repayments now, you demonstrate stronger serviceability and reduce the shading lenders apply when calculating how much more you can borrow.
This approach works particularly well for buyers moving to Augusta from metro areas who still hold an investment property in Perth or further north. Switching the investment loan structure a few months before applying for a new owner occupied loan gives the lender a clearer view of your actual repayment capacity and can open up access to better interest rate discounts on your new loan.
Adjusting your income structure if you're self-employed
Self-employed borrowers in Augusta often have access to more income than their tax returns show, but lenders rely on what's declared. If you're a sole trader or run a company, consider working with your accountant to adjust your income structure in the year or two before you plan to apply. Increasing your declared income, even if it means paying more tax in the short term, can significantly increase your borrowing capacity and open up better home loan options.
Lenders typically average your last two years of taxable income, so the adjustment takes time to flow through. If you're planning to buy in the next 12 to 18 months, this is a conversation worth having now. For buyers moving to Augusta and establishing a business in the region, structuring your income with future lending in mind from the outset avoids having to wait years before you can access the borrowing capacity you need.
Consolidating smaller debts before you apply
Buy now, pay later accounts, afterpay arrangements, and small outstanding balances on store cards all reduce your borrowing capacity. Lenders treat these commitments the same way they treat credit cards, applying a notional limit or calculating a monthly repayment that reduces your serviceability. Clearing these accounts entirely before you apply removes them from the equation.
If you've used these services in the past, check your credit file before you lodge your application. Even closed accounts can sometimes appear as active if the provider hasn't updated the record. Obtaining a closure confirmation and providing it to your broker ensures the lender assesses your position accurately. For first home buyers in Augusta, where deposit sizes are often modest and borrowing capacity is tight, clearing these smaller debts can mean the difference between approval and referral.
Timing your application around income changes
If you're expecting a pay rise, bonus, or change in employment, timing your home loan pre-approval around that shift can increase what you're approved for. Lenders assess your current income, so waiting until a salary increase is confirmed and reflected in your payslips gives you access to a higher borrowing capacity. The same applies if you're moving from casual to permanent employment, or if you're adding a second income to the household.
In a small community like Augusta, where employment is often seasonal or tied to tourism and viticulture, demonstrating stable, ongoing income is particularly important. Lenders want to see at least three months of payslips in your current role, and six to twelve months if your income includes overtime, allowances, or commissions. If you're relocating to the region for work, having your employment contract and a letter from your employer confirming your start date and ongoing hours strengthens your position and can improve the rate and loan amount you're offered.
Reviewing your living expenses before serviceability is calculated
Lenders use either your declared living expenses or a benchmark figure based on your household size, whichever is higher. If your actual spending is lower than the benchmark, you won't gain any advantage. If it's higher, lenders will use your declared amount, which reduces your borrowing capacity. Before you apply, review three months of transaction history and identify discretionary spending you can reduce or remove.
This doesn't mean cutting back on groceries or essentials. It means pausing subscriptions you don't use, consolidating insurance policies, and avoiding large one-off purchases in the months before you apply. Lenders look at patterns, and a consistent reduction in discretionary spending signals that you're managing your finances carefully and can comfortably service a loan.
Understanding your borrowing capacity before you start looking at properties in Augusta gives you a clear price range and removes the uncertainty that comes with making an offer subject to finance. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How does closing a credit card increase my borrowing capacity?
Lenders assess the full limit of every credit card you hold, not just the balance. Even an unused card with a $10,000 limit can reduce your borrowing capacity by $50,000 or more. Closing unused cards before you apply removes this limitation.
Should I pay off my car loan before applying for a home loan?
Paying off a car loan or personal debt before applying can significantly increase your borrowing capacity, sometimes by $80,000 to $100,000 depending on the remaining term and repayment amount. If you have savings beyond your deposit buffer, clearing short-term debts often improves your serviceability more than holding a slightly larger deposit.
How long does it take for income changes to affect my borrowing capacity?
Lenders typically require at least three months of payslips showing your new income level before they'll assess it for borrowing capacity. If your income includes overtime or allowances, most lenders want to see six to twelve months of consistent payments.
Can reducing my living expenses increase how much I can borrow?
Only if your declared expenses are higher than the lender's benchmark. Lenders use whichever figure is greater, so reducing discretionary spending below the benchmark won't increase your capacity, but it does ensure you're assessed at the benchmark level rather than a higher declared amount.
Do buy now, pay later accounts affect my borrowing capacity?
Yes, lenders treat buy now, pay later services like credit cards and factor them into your serviceability assessment. Closing these accounts before you apply removes the impact on your borrowing capacity and improves your overall financial position in the lender's assessment.
