How to Maximise Borrowing Capacity for Property Investments

In Australia’s competitive property market, maximising your borrowing capacity is key to securing the right investment opportunities. Whether you’re a first-time investor or looking to expand your portfolio, understanding how lenders calculate borrowing power can give you a significant advantage.

At Lagos Financial, we’ve helped countless Australian property investors unlock their potential. In this guide, we’ll explore actionable strategies backed by insights and data to help you strengthen your borrowing position.

Understand Borrowing Capacity: The Basics

Borrowing capacity refers to the maximum amount a lender is willing to lend you, based on your financial profile. It’s calculated using:

• Income: Your total earnings, including salary, rental income, and other sources.
• Expenses: Living costs, credit card repayments, and existing debts.
• Debt-to-Income Ratio (DTI): This is a critical metric. In Australia, many lenders prefer DTIs below 6, meaning your total debt should be no more than six times your gross income.
• Credit Score: A score above 700 is considered good, while scores above 800 often attract better loan terms.

For example, an Australian household earning $120,000 annually with minimal debts and a DTI of 5 could potentially borrow up to $600,000.

Boost Your Income Streams

A higher income directly increases your borrowing capacity. Here are some strategies:

• Rental Income: Did you know that most lenders consider 75% of your rental income when calculating borrowing capacity? For example, if you earn $20,000 annually in rental income, lenders may include $15,000 in your assessable income.
• Salary Growth: A $10,000 increase in annual income could boost your borrowing power by approximately $50,000, depending on the lender.
• Secondary Income Streams: Consistent income from a side hustle or freelance work can also strengthen your financial profile, as long as it’s declared in your tax returns.

Pro Tip: If you’re self-employed, ensure your financial records and tax returns are up-to-date and clearly reflect your earnings.

Manage and Reduce Your Expenses

Cutting back on discretionary expenses and managing liabilities can have a profound impact.

• Living Expenses: On average, Australian households spend $2,200 per month on non-essential items (ABS data). Reducing these costs can improve your financial outlook.
• Credit Cards: A $10,000 credit card limit can reduce your borrowing power by $40,000 to $50,000, even if the card is not fully used. Lowering limits or paying off balances can immediately boost your capacity.
• Debt Consolidation: Combining multiple debts into one loan can reduce your overall monthly repayments, improving your cash flow and DTI ratio.

Lender Insight: Banks are particularly wary of excessive spending habits reflected in your bank statements. Cutting back on non-essential expenses, especially leading up to your loan application, can make a difference.

Pay Down Existing Debt

High debt levels are one of the biggest obstacles to borrowing more. Addressing these liabilities strategically can make a significant difference.

• Credit Card Balances: Paying off a $5,000 credit card balance could increase your borrowing capacity by $20,000.
• Personal Loans: Reducing or eliminating a $20,000 personal loan could increase your borrowing power by up to $80,000.
• Car Loans: A $500 monthly car loan repayment can reduce your borrowing capacity by approximately $100,000, depending on the lender’s assessment criteria.

Improve Your Credit Score

Your credit score is a snapshot of your financial reliability. A higher score signals to lenders that you’re a low-risk borrower.

• Check Your Credit Report Regularly: Ensure there are no errors or fraudulent activities.
• Make Payments On Time: Late payments on utilities, loans, or credit cards can hurt your score.
• Avoid Overapplying for Credit: Frequent credit inquiries can negatively affect your score.

A strong credit score not only increases your borrowing power but can also secure better interest rates, saving you money in the long term.

• Australian Average Credit Score: 695 (Equifax).
• Impact of Credit Score: Borrowers with scores above 750 can qualify for lower rates, reducing monthly repayments and improving affordability. For example, reducing your interest rate by 0.5% on a $500,000 loan could save you $1,200 annually.

Did You Know? Some lenders offer better interest rates for borrowers with excellent credit scores, further improving your financial standing.

Choose the Right Loan Structure

Different loan products have varying impacts on borrowing capacity. Work with a mortgage broker to find the structure that aligns with your goals.

Selecting the right loan can influence your borrowing power.

• Interest-Only Loans: These loans temporarily reduce monthly repayments, which can improve your cash flow and allow you to invest further.
• Fixed vs. Variable Rates: Fixed-rate loans provide certainty but may limit borrowing capacity slightly compared to variable rates.
• Offset Accounts: An offset account can reduce the interest paid on your loan while maintaining liquidity.

For example, a $20,000 offset balance on a $400,000 loan at a 5% interest rate could save you $1,000 annually in interest.

Leverage Rental Yield from Existing Properties

If you already own investment properties, optimising their rental income can enhance your borrowing power.

• Update Leases: Review and renegotiate rental agreements to ensure you’re receiving market-competitive returns.
• Add Value: Simple upgrades, such as fresh paint or modern fixtures, can increase rental appeal.
• Minimise Vacancies: Proactively manage tenant relationships and advertise vacancies quickly.

Maximising rental income from properties you already own can directly enhance your borrowing capacity.

• Australian Average Gross Rental Yield: 3.6% for houses, 4.2% for units (CoreLogic).
• How It Helps: Increasing your rental yield by 1% on a $500,000 property could add an extra $5,000 annually to your assessable income, boosting borrowing power significantly.

Tip: Renovations like upgrading kitchens or adding energy-efficient appliances can increase rental appeal and justify higher rent.

Get Pre-Approval to Plan Strategically

Pre-approval gives you clarity on your borrowing limits and strengthens your position as a buyer.

• Typical Pre-Approval Validity: 90 days (varies by lender).
• How It Helps: Knowing your limits upfront can prevent overcommitting and streamline the buying process.

Partner with a Specialist Mortgage Broker

Navigating the complexities of borrowing capacity can be overwhelming, but you don’t have to go it alone. At Lagos Financial, we specialise in property investment solutions tailored to Australian investors.

• Identify lenders with policies that favour property investors.
• Advise on the best loan structures to maximise your capacity.
• Simplify the application process by guiding you every step of the way..

Take Control of Your Borrowing Power

Maximising your borrowing capacity is about preparation, strategy, and working with the right experts. By implementing these steps, you’ll be better positioned to secure funding and achieve your property investment goals.