You ask your bank how much you can borrow. The number comes back smaller than you expected. This happens to a lot of first home buyers, and it is rarely about how much you earn. It is about how lenders read your everyday spending, your existing debts and your savings habits.
Borrowing capacity is the maximum amount a lender will approve for your home loan. Lenders work it out by looking at your income, your regular expenses, any debts you are carrying and how many dependents you support. It is not the same as how much you feel you can comfortably afford, and it can vary from bank to bank for the exact same person. The good news is that several parts of this calculation are within your control, and small changes in the months before you apply can shift the number in your favour.
Why the Number Feels Smaller Than You Expect
Every lender in Australia has to test your application against a rate higher than the one you are actually offered. If you are quoted a rate of 6%, the lender checks whether you could still make your repayments at around 9%. This is called the serviceability buffer, and it currently sits at three percentage points on top of your real rate. It exists to make sure you are not left struggling if interest rates rise after you buy, but it also explains why your approved amount often comes in lower than a simple calculation based on your take-home pay would suggest.
You cannot negotiate this buffer away, and it applies equally at every bank. What varies between lenders is how they treat everything else, your existing debts, your spending, your income type, which is exactly why the steps below are worth your time.
Steps That Can Increase Your Borrowing Capacity
1. Reduce any existing debt.
Credit card limits, car loans, personal loans and buy-now-pay-later accounts all count against you, even if you rarely use them or pay them off in full each month. A lender assesses you against the full limit on a credit card, not your current balance. If you have a $10,000 limit and never carry a balance, the lender still treats that $10,000 as a liability. Paying off and closing accounts you do not need is one of the fastest ways to lift what you are approved to borrow.
2. Cut back discretionary spending before you apply.
Lenders review your bank statements from the past three to six months. Regular spending on takeaway food, subscriptions, streaming services and non-essential shopping is factored into your living expenses and reduces your assessed surplus income. Try tracking your spending for a month, cutting what you do not need, and keeping it that way in the lead-up to your application. Lenders are looking for a consistent pattern, not a single good month.
3. Avoid new debt or big purchases in the lead-up to your application.
A new car loan, a buy-now-pay-later plan for furniture, or even applying for a new credit card can lower your borrowing capacity or delay your approval. Even a rejected application shows up on your credit file. Hold off on any new commitments from around six months before you plan to apply until after settlement.
4. Consider a longer loan term.
A 30-year loan term generally allows for a higher borrowing capacity than a shorter term, because the monthly repayments are lower. This is worth discussing with a mortgage broker, since a longer term also means more interest paid over the life of the loan. You can usually make extra repayments later to pay it off faster once your finances settle.
5. Check your credit report.
Errors on your credit file, or accounts you have forgotten about, can drag down your score and your borrowing capacity without you realising. You can request a free copy of your report from Equifax, illion or Experian. Check it at least three months before you plan to apply, so you have time to fix any mistakes.
6. Add a co-borrower if that fits your situation.
Buying with a partner, family member or friend can increase combined borrowing capacity, though it also means shared responsibility for the loan. If you are buying alone, ask a mortgage broker to model your capacity under a few different scenarios so you know exactly what a single income supports, and what a slightly higher deposit or a cheaper property type would change.
7. Reduce how much you need to borrow.
Government schemes can lower your deposit requirements without raising your risk profile in a lender’s eyes. Penny has separate guides on the First Home Guarantee, the Help to Buy scheme and the First Home Super Saver Scheme, all of which can reduce the amount you need to save or borrow.
Preparing Yourself Before You Apply
Start three to six months out.
Most of the steps above take time to show up on your bank statements and credit file. Paying off a credit card the week before you apply helps less than paying it off, closing the account, and letting your statements reflect that change for a few months.
Get your documents in order early.
Lenders typically ask for:
- Your last two to three payslips
- Your most recent tax return or notice of assessment
- Three to six months of bank statements, including savings and any transaction accounts (or two years of tax returns if you’re self-employed)
- Evidence of your savings history and deposit source
- Details of any existing debts, including credit card and BNPL limits
Having these ready before you approach a broker or bank speeds up the process and avoids delays that can cost you a property you have your eye on.
Build a genuine savings history.
Most lenders want to see three to six months of consistent, regular saving, separate from any gifted deposit. It does not need to be a large amount each time. What matters is that it looks deliberate rather than a one-off deposit before you apply.
Talk to a mortgage broker before you talk to a bank.
A broker can compare your position across multiple lenders, since every bank calculates serviceability a little differently. One lender might approve you for $50,000 more than another, purely because of how they treat your industry, your overtime income, or your existing debts. This costs you nothing and can make a real difference to your final approved amount.
Get pre-approval before you start inspecting properties seriously.
Pre-approval gives you a clear budget and shows agents and vendors that you are a serious buyer. Penny’s guide to getting pre-approval for a home loan covers this in detail, including timing and what pre-approval does and does not guarantee.
What This Means for You Right Now
First home buyers are one of the few groups still increasing their loan applications, even as other buyers hold back . Property values have also softened in many of the more affordable suburbs that first home buyers tend to target, and auctions are clearing at lower rates than usual, which gives buyers more room to negotiate .
None of this guarantees a particular outcome for your purchase. But it does mean less competition and a little more breathing room than first home buyers have had in recent years. Improving your borrowing capacity now puts you in a stronger position to make the most of it.
Quick Checklist
- Pay off and close credit cards, personal loans or BNPL accounts you do not need
- Track and reduce discretionary spending for at least three months
- Avoid new debt or credit applications in the six months before you apply
- Check and correct your credit report
- Gather payslips, tax returns, bank statements and savings history
- Speak with a mortgage broker to compare lenders
- Apply for pre-approval before you start inspecting properties
Want help finding a trusted mortgage broker or property inspector? Find one in the Penny app.
This article is general information only and does not take into account your personal financial situation. It is not financial advice. Consider speaking with a licensed mortgage broker or financial adviser before making decisions about your home loan.
Sources
Axton Finance – “What is a debt serviceability buffer and how does it affect your borrowing capacity?” August 2026.
The Guardian Australia, Luca Ittimani – “‘Pent-up demand’: first home buyers chase more loans as property investors step back, data shows.” 23 August 2026.
Australian Financial Review, Sarah Petty – “Why a rare buyer’s property market has so few buyers.” 28 August 2026.
Suggested meta description: Practical, real-world tips on how to increase your borrowing capacity as a first home buyer in Australia, and how to prepare before you apply.