A Simple Guide to Borrowing Capacity: What It Is and How to Improve It

Let’s talk about borrowing capacity — arguably the most important aspect of home buying — yet it’s rarely explained in simple terms, or how you can improve it. That’s where I step in. While some of the calculation metrics are out of your control, did you know that banks are required by to add 3% to the current interest rate when assessing your maximum borrowing capacity? They also apply a minimum monthly living expense figure based on an extensive matrix. These factors can’t be changed — but many other figures are well within your power to influence.

I’m going to break this down as simply as possible to help you understand how borrowing capacity works and how your spending habits directly impact your ability to borrow.

Let’s imagine you earn $5,000 per month after tax (I know your income might be more or less, but the principle stays the same). That $5,000 is your starting point — your disposable income. Now we start subtracting.

First, there are the essential expenses — utilities, phone bills, groceries — the non-negotiables. Let’s say utilities and phone bills total $200 per month. That leaves you with $4,800. Next, groceries (a guy’s gotta eat, right?) let’s budget $1,100 per month, leaving you with $3,700. Life also throws in some surprises, doctor’s appointments, car repairs, haircuts... so we’ll allocate $200 per month for those, bringing you down to $3,500. That $3,500 is a healthy disposable income. Based on a 6.00% interest rate, it’s enough to cover the repayments for a $580,000 loan — potentially your first home under the government First Home Loan Deposit Scheme with a 5% deposit.

But then come the discretionary purchases, the ‘wants’ rather than the ‘needs.’ That new iPhone on a $50 per month plan? That single expense could reduce your borrowing capacity by around $8,000. A $5,000 credit card limit, even if you don’t use it, can knock off roughly $25,000 from your borrowing power. And that $30,000 car loan? It’s likely cutting your borrowing capacity by around $150,000 ($30k loan, 6.5% over 7 years). Suddenly, your $3,500 disposable income is reduced to $2,900 slashing your borrowing capacity from $580,000 to around $397,000.

The takeaway? Any ongoing expenses you commit to will directly impact your borrowing capacity. I’m not saying you shouldn’t treat yourself — life is for living, after all — but if buying your first home, upgrading to a bigger place, or downsizing is on the horizon, it might be worth holding off on the luxuries for a little while to help you get into the best financial position possible.

If you’re not sure where to start or want help working out your borrowing capacity, reach out. I’m always happy to help guide you through the process.