How to Increase Your Home Loan Amount
Want to borrow more money for your home?
You’re not alone. Many Australians need a bigger loan to buy their dream house or investment property. But banks don’t just hand out money to everyone who asks. They need to be sure you can pay it back.
The good news is that there are clear steps you can take to increase your borrowing power. Banks look at four main things when deciding how much to lend you. These are called the 4 C’s of Credit: Character, Cashflow, Collateral, and Capital. Let’s break down what each one means and how you can improve them.
Understanding Your Borrowing Power
Your borrowing power is simply how much money a bank will lend you. It’s not the same for everyone. Two people with the same job might be offered different loan amounts. Why? Because banks look at many factors to work out how much you can safely borrow.
Think of it like this: Would you lend money to a friend who never pays you back? Probably not. Banks feel the same way. They want to lend to people who can and will repay the loan. That’s where the 4 C’s come in.
Character: Show Banks You’re Reliable
Character is about trust. Banks want to know if you’re the type of person who pays their bills on time. They check this by looking at your credit history and credit score.
What is a Credit Score?
Your credit score is like a report card for how you handle money. In Australia, it ranges from 0 to 1,200. A higher score means banks see you as less risky. Most banks want to see a score above 600, but 700 or more is better.
How to Improve Your Character
Here’s what helps:
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- Pay all your bills on time, every time
- Keep your credit card balances low
- Don’t apply for too many loans or credit cards at once
- Check your credit report for mistakes and fix them
- Stay in your job for at least 6 months before applying
Building good character takes time, but it’s worth it. Even small improvements to your credit score can mean borrowing thousands more.
Cashflow: Prove You Can Afford It
Cashflow is all about the money coming in and going out. Banks need to see that you earn enough to pay your loan repayments, plus all your other expenses, and still have money left over.
What Banks Look At
Banks check your income from all sources. This includes your salary, rental income, bonuses, and any government payments. They also look at your expenses like rent, groceries, bills, and other loan repayments.
Most banks use a simple rule: your total loan repayments shouldn’t be more than 35% of your income. Some are stricter and want it below 30%.
How to Improve Your Cashflow
To borrow more, try these tips:
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- Increase your income with a pay rise, promotion, or side job
- Pay off smaller debts like credit cards or personal loans
- Reduce your credit card limits, even if you don’t use them
- Cut back on regular expenses like subscriptions
- Add a second income earner to the loan application
Remember, banks look at potential spending, not just actual spending. If you have a credit card with a $10,000 limit, they assume you might max it out one day. Even if the card has a zero balance, it counts against you.
Collateral: Increase the Value You Can Offer
Collateral is the asset you use as security for your loan. For home loans, this is usually the property you’re buying. If you can’t repay the loan, the bank can sell the property to get their money back.
Why Collateral Matters
The more valuable your collateral, the more you can borrow. Banks feel safer lending larger amounts when they know the property is worth enough to cover the loan.
Banks also look at something called Loan to Value Ratio or LVR. This is how much you’re borrowing compared to the property’s value. A lower LVR means you’re borrowing less and putting in more of your own money, which banks love.
How to Improve Your Collateral Position
Here’s what you can do:
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- Save a bigger deposit to lower your LVR
- Choose a property in a stable or growing area
- Consider using equity from another property you own
- Get a professional property valuation to show true market value
Most banks prefer an LVR of 80% or less. This means if you’re buying a $500,000 home, you’d need a $100,000 deposit to borrow $400,000. The lower your LVR, the better your interest rate and the more you can potentially borrow.
Capital: Build Your Financial Safety Net
Capital means your savings and assets. It shows banks that you’re good at managing money and have a backup plan if things go wrong.
Why Capital is Important
Banks want to see that you can save money regularly. It proves you can manage your finances. They also like to see that you have money left over after paying your deposit and buying costs.
Having genuine savings is better than getting all your deposit as a gift from family. Banks want to see that you can save at least 5% of the deposit yourself over time.
How to Build Your Capital
Try these strategies:
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- Set up automatic transfers to a savings account
- Keep your savings in the account for at least 3 months
- Don’t dip into your savings unnecessarily
- Build an emergency fund of 3-6 months’ expenses
- Consider other assets like shares or superannuation
Banks look at your savings history over at least 3 months. They want to see consistent saving, not a sudden lump sum that appeared just before you applied. This is called genuine savings, and it carries more weight.
Putting It All Together
Increasing your home loan amount isn’t about tricking banks. It’s about showing them you’re a responsible borrower who can handle a bigger loan. The 4 C’s work together to paint a picture of your financial situation.
Here’s your action plan:
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- Start improving your credit score 6-12 months before applying
- Work on increasing income and reducing expenses
- Save as much as possible for your deposit
- Keep detailed records of your savings and income
Working with your Awesome Mortgage Broker
This might all seem complicated, and that’s okay. That’s where mortgage brokers come in. A good broker knows exactly what different banks are looking for and can help you present your application in the best light.
Brokers can also help you compare loans from different banks. Some banks might lend you more than others based on their lending criteria. Getting expert help can make a huge difference to how much you can borrow.
Final Thoughts
Increasing your home loan amount takes time and effort, but it’s definitely possible. Focus on the 4 C’s: build your character through good credit habits, improve your cashflow by earning more and spending less, strengthen your collateral with a bigger deposit, and grow your capital through consistent saving.
Remember, every person’s situation is different. What works for one borrower might not work for another. The most important thing is to start improving your financial position today. Even small changes can add up to thousands of dollars in extra borrowing power.
Start with one or two changes that feel manageable. As you build good habits, you’ll find it easier to tackle the bigger goals. Before you know it, you’ll be ready to apply for that larger home loan with confidence.