The guideGetting prepared2 min read

Borrowing power and pre-approval

How lenders decide what you can borrow, and the six steps to a pre-approval that means something.

Before you look seriously, you need two numbers: what a lender will advance you, and what you're comfortable repaying. They are rarely the same. Pre-approval turns the first into something an agent will take seriously.

How lenders work out your borrowing capacity

Income and employment stability

Full-time, part-time, contract and self-employed are assessed differently. Most lenders want six to twelve months in your current role, and two years of returns if you work for yourself. Overtime, commission and bonuses are often counted at a discount, or not at all.

Existing debts

Credit cards, personal loans, car finance, HECS and buy-now-pay-later all count. A credit card is assessed at its limit, not its balance: an unused $15,000 limit reduces your borrowing power as though you'd spent it.

Living expenses

Assessed from your statements and against a benchmark, the Household Expenditure Measure. The benchmark rises sharply with each dependant. Three months of tidy, legible spending before you apply is worth real money.

Deposit size and LVR

Your loan as a percentage of the property's value. Above 80% you generally pay lenders mortgage insurance, unless a government guarantee or a guarantor removes it. A larger deposit can also buy a better rate.

The serviceability buffer

Lenders must test you at a rate around three percentage points above the one you're offered. This is why the amount you can borrow is well below what today's repayment would suggest, and it is not negotiable.

Six steps to pre-approval

  1. 01

    Check your credit report

    Free from Credit Savvy, Get Credit Score, or the credit bureaus directly. Fix errors now; they take weeks to correct.

  2. 02

    Reduce what you owe

    Pay down high-interest debt, and close or reduce credit cards you don't use. This is the fastest lever on your borrowing power.

  3. 03

    Get your documents together

    Recent payslips and two years of tax returns if you're self-employed; bank statements showing income and savings; a list of debts and expenses; photo identification. Lenders verify all of it.

  4. 04

    Work out your own number first

    Run your real income and spending through a borrowing calculator, and test it at a higher rate, so you arrive with a view rather than taking theirs.

  5. 05

    Compare lenders and loans

    Rates, fees, and whether the features you want are available. A broker compares across their panel; ask which lenders aren't on it.

  6. 06

    Apply for conditional pre-approval

    Usually valid for three to six months. Be straightforwardly honest: everything is verified before final approval, and a discrepancy found late can sink a purchase.

Do this in HomePlannerBorrowing power calculator Your borrowing power from real numbers, tested at higher rates, updated as your finances change.Free account required

Before you move on

  • You know what a lender will count as income
  • Unused credit limits reduced or closed
  • Three months of clean statements behind you
  • Documents assembled before you apply
  • You hold a current conditional pre-approval and know when it lapses