When it comes to borrowing money, whether for a home loan, a car loan, or an investment, one of the most critical factors lenders assess is your borrowing power. Simply put, your borrowing power is how much a lender is willing to let you borrow based on your financial situation. But there’s a catch: the debt you already have can significantly reduce how much you’re eligible to borrow.

In this blog, we’ll explore the different types of debt—like HECS-HELP student loans, credit card limits, personal loans, car loans, and existing house loans—and how they impact your borrowing power. By the end, you’ll know what to look out for and how to make your finances work harder for you.

What Is Borrowing Power?

Borrowing power is essentially how much a bank or lender thinks you can afford to borrow based on your income, expenses, and existing financial obligations. They look at factors like:

• Your income (salary, rental income, etc.).
• Your expenses (living costs, subscriptions, and bills).
• Your debt (current loans, credit cards, and even student loans).
• Interest rates (higher rates mean higher repayments, which can reduce borrowing power).
• The currency of your income if you’re an Australian expat.
• Your employment – i.e. are you self-employed, employed full-time or working on a casual basis.
• Your country of residence if you're an Australian expat

Lenders use these factors to calculate your Debt-to-Income (DTI) ratio and your serviceability—a fancy way of saying how much money you have left over after all your financial obligations. The higher your debts, the lower your borrowing power.

Let’s break down how each type of debt comes into play.

How Different Types of Debt Impact Your Borrowing Power

1. HECS-HELP Student Loans

If you have a HECS-HELP student loan, you might think it’s not a big deal because there are no regular repayments unless you earn over a certain threshold. But lenders think differently.

When your income hits the repayment threshold (around $54,435 in the 2024-25 financial year), you’re required to make repayments based on a percentage of your salary. These repayments can range from 1% to 10% of your income, depending on how much you earn.

How it affects you:

• Lenders treat HECS-HELP repayments like any other debt obligation.
• Even though it’s deducted from your salary, it reduces your disposable income, which directly lowers your borrowing power.

Example:
If you earn $85,000 a year, your HECS-HELP repayment rate is 4.5%. That’s $3,825 a year—or about $319 a month—that lenders see as unavailable for mortgage repayments. In some cases, you may be best using a portion of your deposit to clear your HECS loan to boost your borrowing power, but it's important to seek advice and consider your options before doing so.

2. Credit Card Limits

Here’s a surprising fact: lenders assess your credit card limit, not your current balance. So, even if you never use your credit card or always pay it off in full, the maximum limit still counts as a potential liability.

Why?
Banks assume you could max out your credit card at any time, adding to your financial commitments.

How it affects you:

• Every $1,000 in credit card limits reduces your borrowing power by around $5,000-$6,000.
• A high-limit credit card you rarely use could unnecessarily drag down your borrowing capacity.

Consider lowering your credit card limit if you’re applying for a loan. For example, reducing a $20,000 limit to $5,000 could significantly increase how much you can borrow.

3. Personal Loans

Personal loans, whether they’re for a holiday, a wedding, or consolidating other debts, can be a major factor in reducing your borrowing power. This is because personal loans typically come with fixed monthly repayments, which are treated as non-negotiable liabilities.

How it affects you:

• Lenders factor in the full monthly repayment when assessing your serviceability.
• Even a relatively small personal loan can have a big impact, as it reduces the income available for other loans.

Example:
If you have a $15,000 personal loan with a $400 monthly repayment, a lender will see that as $400 less you can use toward repaying a mortgage.

4. Car Loans

Car loans work similarly to personal loans, except they’re usually secured against your vehicle. While it might feel great to drive away in a shiny new car, the ongoing repayments can weigh heavily on your borrowing capacity.

How it affects you:

• Like personal loans, car loan repayments are treated as fixed liabilities.
• The larger the loan or the longer the term, the more it eats into your borrowing power.

Example:
A $30,000 car loan with monthly repayments of $600 could reduce your borrowing capacity by $100,000 or more, depending on the lender If you’re planning to buy a property, consider holding off on taking out a car loan until after your home loan is secured.

5. Existing House Loans

If you already have a mortgage, lenders will assess your existing repayments as part of your overall liabilities. This includes:

• Owner-occupied loans (your primary residence).
• Investment property loans.

While rental income from an investment property might offset some of the liability, it’s usually discounted by lenders to account for potential vacancies or expenses.

How it affects you:

• Your borrowing power is reduced by the total monthly repayments on your current home loan.
• If you’re refinancing, your existing loan balance will also impact the amount you can borrow.

Consider refinancing or consolidating debts to improve your cash flow and increase your borrowing capacity.

Tips to Manage Debt and Maximise Borrowing Power

Managing your debt wisely can make a big difference when applying for a loan. Here are some actionable tips to improve your borrowing power:

1. Pay Off Small Debts First

Focus on clearing smaller debts, like personal loans or credit card balances, to free up your cash flow. Every dollar less in repayments increases your borrowing capacity.

2. Lower Your Credit Card Limits

If you’re not using the full limit on your credit card, ask your bank to reduce it. For example, lowering a $10,000 limit to $2,000 could significantly boost your borrowing power.

3. Consolidate High-Interest Debts

Combine multiple debts into a single loan with a lower interest rate. This can reduce your total monthly repayments, making your finances more appealing to lenders.

4. Delay Major Purchases

If you’re planning to buy a car or make a big purchase on credit, consider waiting until after your home loan is approved.

5. Plan Your HECS-HELP Repayments

If you’re a high-income earner, consider paying down your HECS-HELP debt sooner rather than later. While it’s not always necessary, reducing this debt can give you a little extra borrowing power.

Navigating the world of borrowing can be complex, especially when you have multiple types of debt. A mortgage broker or financial adviser can help you:

• Assess your current financial situation.
• Structure your debts to improve borrowing power.
• Find the right lender for your unique circumstances.

Conclusion

Your existing debt plays a huge role in determining how much you can borrow. From HECS-HELP student loans to credit card limits, personal loans, car loans, and existing mortgages, every financial obligation is carefully scrutinised by lenders. But with smart debt management and a clear strategy, you can maximise your borrowing power and achieve your financial goals.

Start by reviewing your current debts, taking small steps to pay off or consolidate them, and seeking professional advice when needed. Remember, understanding your borrowing power isn’t just about getting a loan—it’s about creating a secure financial future.

Ready to take the next step? Assess your borrowing power today and see what’s possible!

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.