Buying a home is a big step in your life, and with your first home it’s a big celebration but applying for your first home loan can be a tricky process to navigate. As a potential homebuyer, you generally have an idea of how much you can afford but nothing is set in stone until a lender confirms your borrowing capacity.

Borrowing capacity is the amount of money a lender is willing to loan you. Understanding borrowing capacity and what you can do to improve it is the first step to owning property. There are many factors that can affect your borrowing capacity, however, at the end of the day it does come down to your relationship with your broker and the lender’s decision. One of the ways we may complete this evaluation of your charges is through the Household Expenditure Method (HEM).

Household Expenditure Method (HEM)

HEM is the benchmark banks use to estimate annual expenses. It was developed by the Melbourne Institute and bases its evaluation on your income, lifestyle choices (basic, standard, moderate, lavish), location and family size.

Factors that affect your borrowing capacity

When applying for a home loan it is all about what assets and expenses you have and whether or not you are a reliable client. To do this, we often look at all of your financials and your credit history, and whether or not you have been able to follow a payment plan. At Melbourne Finance, we go further by getting to know you and your lifestyle in order to find you the best home loan option.


Income can be one of the biggest barriers to getting approved for a home loan. If you have a fluctuating income or irregular income it can be hard for lenders to confidently approve your loan. When we begin your home loan application, we verify all of your income streams and navigate you through this barrier.

Income is one of the biggest factors that affect borrowing capacity as it is a key indicator of how comfortably you live and whether or not you can afford monthly repayments. For example, if you have a decent income, credit cards and other loans, lenders are more likely to lend you a higher amount as it indicates you will be able to continue with your lifestyle and pay back a mortgage.

Current Expenses

Current expenses aren’t necessarily your gym memberships or your coffee orders but bigger expenditures such as your current mortgage, your rent and your car repayments. These have an impact on your borrowing capacity because you have already committed to them. We are very cautious about what you have already committed to because it can affect your ability to make mortgage repayments and keep your current lifestyle. Alongside evaluating your larger expenditures we will ask you to summarise itemised costs such as:

  • Groceries
  • Education Expenses such as ongoing childcare or school fees
  • Insurance and Utilities such as electricity, gas
  • Transportation
  • Pets

Buy Now Pay Later (BNPL)

The most recent reason our clients have been knocked back for loans is due to lines of credit through Buy Now Pay Later initiatives such as AfterPay. Using these initiatives can be risky as there are no credit limits on how much you can spend and therefore how much you can owe. Potential homeowners often forget their AfterPay charges as a frequent expense and banks have begun to question and scrutinise home loan applications to know exactly what these purchases are. As BNPL initiatives are taking preference over credit cards, they begin to have a similar effect to a person’s borrowing capacity, as the more you owe the less money lenders are willing to loan you.

Credit Cards

Credit cards have a negative impact on your borrowing capacity as they are often perceived as how much you owe the bank. They affect your borrowing capacity as yet another deduction that will be subtracted from your income to determine how comfortable your lifestyle is. However, a benefit of having a credit card is that it can positively impact your credit score if you are on top of repayments.

Current Interest Rates

This one is out of all potential buyers’ control as interest rates are based on Australia’s current profitability standings. The higher the interest rate, again the less you can borrow. Generally what will occur is a lender will consider interest rates but will want to ensure you can pay off the repayments; instead of applying the current interest rates, they will apply a 2-3% buffer to what they will lend to confirm that you can comfortably afford to take out a mortgage.

Increasing my borrowing capacity

There are many things that can negatively affect your borrowing capacity, but some factors may improve your likelihood of securing a home loan.

Understand Your Expenses

Your living expenses could be detrimental to your home loan application, but what can make the application process smoother is having a genuine understanding of your expenses. Note how much you spend on groceries and keep track of your utilities bills. Paint the picture of your lifestyle through your expenses and show that you’re the perfect candidate for a home loan.

Have Genuine Savings

It’s not all about applying for a home loan but saving for a home. A home loan application is processed quicker and lenders are more willing to lend money to people who have substantial and genuine savings. Having savings completely dedicated to buying a home indicates that you have been thinking about buying a home for a while and that you have a backup option should your income stream become unavailable. By having made regular savings deposits while maintaining your current lifestyle, you position yourself as someone who can afford a mortgage.

Not your everyday brokers

At Melbourne Finance, we know how important it is to be buying a home. We also know the industry is filled with confusing language and processes which is why it is a part of our mission to make buying a home as easy and transparent as possible. If you are looking for a friendly broker to help you apply for a home loan, get in touch!