Borrowing capacity: what actually affects it

Lenders look at four things, and three of them can be improved in a few months. The fourth is the one people forget.

Borrowing capacity is the lender's answer to "how much can this person carry". Contrary to popular belief it does not come down to salary.

1. Income — but counted their way

The lender does not take the figure from your contract; it takes the income it considers repeatable.

Salary from a permanent employment contract counts in full. Bonuses, overtime and commission often count only partly or not at all if they have not recurred for some time. Income from self-employment is usually averaged over the last year or two, after costs.

The practical conclusion: changing your form of employment shortly before applying can lower capacity more than a raise increases it. If you are planning both a loan and a job change, the order matters.

2. The total of payments, not the total of debt

This is the most common misunderstanding. The lender does not look at how much you owe, but at how much you pay each month.

A 200 000 loan with a payment of 1 200 weighs on capacity less than three small obligations of 700 each. This is why consolidation can be effective — not because it reduces the debt, but because it reduces the total of payments.

3. Limits you do not use

This is where most capacity disappears for no benefit whatsoever.

A credit card with a 20 000 limit and a zero balance still reduces capacity, because the lender counts it as debt you could take on overnight. The same applies to an overdraft.

Closing unused limits a few weeks before applying is the simplest thing you can do — it costs one phone call and takes nothing away, since you are not using the money anyway.

4. Dependants and cost of living

Lenders assume household living costs from their own tables, based on the number of people. Every dependant lowers capacity by a set amount regardless of what you actually spend.

This one cannot be "improved", and it is worth knowing before the conversation so the result is not a surprise.

What the lender cannot see but still counts in your favour

Credit history. A well-repaid loan is an argument. Someone with no history at all can be a harder case than someone with a good one — there is no evidence they return money on time.

Deposit. On a mortgage a larger deposit means not only a smaller loan but better terms, because the lender's risk falls.

What to do three months before applying