Easy ways to boost your borrowing capacity for the interest rate drop

Those looking to purchase a home are still facing significant challenges in 2025. Despite a slowdown in home price increases and a surge in available stock, rent and living costs remain crippling for many, while higher interest rates have increased mortgage repayments and decreased borrowing capacities.

A reduction in the cash rate may be on the horizon, but this could actually make it even harder for buyers, explains AMP director of lending and everyday banking Michael Christofides.

"In simple terms, if interest rates go down, your borrowing power should go up. However, when rates go down, it also drives more demand into the market, which can push property prices up.

"My advice is to be proactive," he adds.

Here are practical strategies to enhance your borrowing capacity, bringing the dream of home ownership closer:

1. Engage a broker early 

Engaging a mortgage broker six to 12 months before you plan to purchase is a wise step, says Sydney-based Mortgage Choice broker Terri Unwin. "They can look at your borrowing capacity now and what you can do to improve that."

For example, you may have a decent deposit but are falling short on your ability to service a loan.

"You may have a $30,000 HECS debt you can clear, which could potentially increase your borrowing capacity by $100,000," she said.

'What does a mortgage broker do?' youtube.com.au/mortgagechoice

2. Mock up some tax returns

If you're self-employed, have your tax adviser draft some tax returns to discuss with your broker their impact on your borrowing capacity, Ms Unwin suggests.

"If you earn $150,000 but your accountant's been very creative so you've only paid tax on $75,000, banks will use that as your take-home income when assessing borrowing capacity.

"We can work with your accountant so you can still claim some deductions, but not too many to impact your ability to make loan repayments."

Also, review payslips for salary sacrificing, pre-tax deductions, additional super payments or novated leases, she adds.

"All this may reduce your taxable income but have a huge impact on your borrowing capacity. A broker can do the calculations based on those salary sacrifice payments stopping."

3. Demonstrate good habits

Banks want assurance that you can service a loan, so are wary of credit cards with high limits and frequent use of 'buy now, pay later' (BNPL) services like Afterpay and ZipPay, as these can imply financial strain.

Lenders will be conscious of credit card debit as well as credit limits when they make an assessment. Picture: Getty

"All this can affect your credit rating," Ms Unwin explains, noting that lenders may require three months of bank statements.

She recommends paying off loans and credit card bills on time, reducing credit card limits, or — even better — ditching the credit card for a debit card.

Mr Christofides advises adopting good spending habits by cutting unnecessary expenses, such as streaming services and dining out, to boost your deposit.

"The lower your costs and expenses, the better your borrowing power. And if you've shown that you're putting money aside and growing your savings, that's a sign of good financial discipline."

4. Increase your income

Boosting your income can enhance your borrowing capacity. Consider negotiating a pay rise, working extra hours, taking a second job or starting a side hustle, Mr Christofides says. But, proceed with caution.

"If you have extra time over your week or month, then a side hustle might make sense, but extra income can often take away time with your family and friends."

Ms Unwin notes that banks may not recognise income from a new side hustle.

'Borrowing capacity explained': youtube.com/mortgagechoice

"Most banks will want to see a two-year history. And if someone is going to generate enough income from their side hustle to affect what they can borrow, they'll also be liable for more tax."

5. Secure a cheaper rental while you save

High rents certainly makes saving challenging, so consider moving to a more affordable area, sharing with others, or moving in with family. This savings buffer can help build your deposit, improving loan options.

Ms Unwin advises treating your rent as a trial run for mortgage payments.

"Once you've seen a broker and know what you can borrow, work out your expected weekly repayments. Compare this with your current rent and put aside any difference in a separate account.

"This demonstrates to the bank that you prioritise mortgage payments and also serves as forced savings. Plus, it's a way of testing what you can afford."

6. Find a guarantor

If saving for a deposit seems unattainable, explore the option of a guarantor loan or sharing your loan with a family or friend. This can reduce your personal need for a substantial deposit, enhancing your borrowing capacity.

'What is a guarantor?' youtube.com/mortgagechoice

But Mr Christofides warns this is a "serious commitment".

"These people may be liable if things go wrong."

7. Increase the term of your loan

While the typical loan term in Australia is 25 to 30 years, some lenders offer a 40-year term.

Mr Christofides says it's important to weigh up the pros and cons of a longer loan term.

"It can absolutely improve your borrowing power and reduce your repayments. But it's important to remember that over the course of the loan, the amount of interest you pay will be larger."

Online calculators can help you work out how extending that term will impact your repayments.

8. Use LMI

Lenders' Mortgage Insurance (LMI) can help buyers enter the market sooner if they're struggling to save a 20% deposit, or they want to get in before prices rise.

'What is LMI?': youtube.com/mortgagechoice

However, this comes with higher costs, which vary according to deposit, property value and lender. As a guide, a 15% deposit on a $500,000 property might cost around $5,000 in LMI; a 5% deposit on a $1 million property could cost nearer $50,000.  Plus a larger loan results in higher repayments — at least temporarily.

Ms Unwin advises doing the sums: calculating potential property price increases while saving for a 20% deposit and comparing this to the cost of LMI, the additional repayments and the rent you'd have to pay during the saving period.

9. Stay within your means

Experts emphasise that maxing out your borrowing capacity may get you a better home but isn't worthwhile if it strains your finances each month.

"Just because the bank says you can borrow $750,000, doesn't mean you should," said Ms Unwin.

"Borrow within your means," added Mr Christofides. "While lenders follow responsible lending practices and assess customers with buffers above current interest rates, it's crucial for customers to ensure they're not overextending themselves."