How to Increase Borrowing Capacity for Investment Property in Australia

Kristen Jordan
Apr 29
5 min read

Your income has not changed. Your properties are tenanted, and your repayments are manageable. Yet the bank just declined your next application.

If this sounds familiar, you are not alone. Investors across Australia are running into serviceability constraints, often around the second or third property.

The issue is not your financial position. It sits in how lenders calculate your capacity to borrow.

The thing holding you back may not be your income. It could be your debt. More specifically, what lenders see as bad debt.

The Real Bottleneck: Bad Debt

Before looking at any other strategy, this is where to start. In lending terms, bad debt is any liability that adds to your commitments without supporting income or growth.

It does not mean you have missed payments or defaulted. It simply means the debt is working against you in a lender's servicing calculator.

Every dollar committed to bad debt reduces what is available for new lending. Cleaning it up is often the strongest starting point to increase borrowing capacity for investment property in Australia.

What counts as bad debt?

Credit cards. Lenders assess repayment obligations based on the full credit limit, not the balance owing. A $20,000 card with a zero balance still counts against your capacity.
Personal loans. Fixed monthly commitments that do not generate income reduce serviceability directly.
Car finance. Vehicle repayments add to your monthly outgoings without contributing any income in return.
Buy now, pay later. These facilities now fall under credit licensing obligations and can be factored into lender assessments. Even small balances may add up across multiple accounts.
HECS/HELP debt. It reduces your usable income and does not support investment growth. Lenders account for the compulsory repayment obligation when calculating serviceability.

None of these debts helps you borrow more. Every one of them makes it harder. Reducing or removing them is often the fastest way to shift your position.

What to Do About It

Now that you know what bad debt looks like, the next step is working through it. The goal is to reduce or remove as many of these liabilities as possible before you apply.

Reduce or eliminate where possible

Start by reviewing your credit card limits. If you have cards you are not using, close them or reduce the limit.

The same applies to personal loans or car finance. These can often be paid down ahead of time to improve your position.

Buy now, pay later accounts should be closed where possible. Even if the balance is low, lenders may factor it into your overall commitments.

Consider debt consolidation

In some cases, consolidating multiple bad debts into a single facility can reduce your overall monthly commitments. This may improve how a lender views your servicing position.

However, consolidation can increase total debt over the long term. It should be weighed carefully against your borrowing goals and assessed on a case-by-case basis.

Approach HECS/HELP strategically

You might not expect that getting your education could hold you back from getting a home. But HECS/HELP repayments scale with income, and lenders factor this into their serviceability calculations.

If you are close to paying it off, clearing the balance may be worth considering. If the balance is larger, it becomes something to factor into your strategy rather than aggressively restructuring.

Your Spending Habits Are Under the Microscope

This one catches people off guard. Lenders do not just look at your income and debts. They scrutinise your bank statements in detail.

Frequent Uber Eats orders, forgotten subscriptions, and regular tap-and-go purchases all add up. If your declared expenses do not match what the bank sees, it can raise questions.

Overdrafts, dishonoured payments, and gambling transactions are red flags. Even consistent discretionary spending can work against you in a serviceability assessment.

The fix is simple but effective. In the months leading up to your application, tighten your spending and keep your statements clean.

Tax Benefits or Borrowing Capacity: Pick One

This is one of the more misunderstood areas of property finance. Investors are frequently told to use interest-only repayments for cash flow and tax benefits.

And there is truth to that, interest-only can help with short-term cash flow and may offer tax advantages. But here is what often gets missed: interest-only lending does not typically improve borrowing capacity. In fact, it can hinder it.

P&I repayments reduce your debt over time. This can improve how a lender views your ability to take on new lending.

So the real question is: what are you optimising for? It comes down to two goals:

Maximise borrowing capacity. Structure lending, including P&I repayments, to improve your servicing position.
Maximise cash flow and tax benefits. Interest-only may suit your situation, but it can come at the cost of future capacity.

You may not be able to optimise for both at the same time. Knowing the trade-off upfront can shape a stronger strategy.

Refinancing to Access a Different Servicing Model

Beyond cleaning up debt and loan structure, the lender itself can make a difference. Lenders vary in their assessment floors and servicing models.

Refinancing to one with a more favourable approach can improve outcomes. This is especially relevant when your current lender has reached its internal exposure limits.

Non-bank lenders can also offer servicing policies that may open doors. They carry their own considerations around pricing and product features, so they should be assessed carefully.

Ready to Review Your Borrowing Position?

If you want to increase borrowing capacity for investment property in Australia, start with the fundamentals. Clean up bad debt, tighten your spending, and align your loan structure to your goals.

Book a strategy session with National Financial Services to review your current position and explore your options. A clear picture of where you stand is the first step toward unlocking your next purchase.

Frequently Asked Questions

What is bad debt in a lending context?

Bad debt is any liability that adds to your commitments without supporting income or growth. Credit cards, personal loans, car finance, and buy now pay later facilities all fall into this category.

Does interest-only lending increase borrowing capacity?

Not typically. Interest-only can help with cash flow and may offer tax benefits. However, P&I repayments can result in a stronger servicing position for future lending.

Should I pay off my HECS/HELP debt before applying?

It depends on the balance. If you are close to paying it off, clearing it may improve your position. If the balance is larger, it is something to factor into your strategy. HECS/HELP repayments scale with income, which reduces the amount available for servicing.

Do lenders really look at my bank statements that closely?

Yes. Lenders review recent transaction history to verify declared expenses and assess financial conduct. Inconsistent spending, overdrafts, or high discretionary purchases can influence the outcome of your application.

Can switching lenders increase borrowing capacity?

Lenders vary in their servicing models, assessment floors, and DTI thresholds. Switching to one with a more favourable policy may improve borrowing power. Refinancing for serviceability purposes can potentially reopen access to further lending.

Disclaimer: The information in this article is general in nature and does not take into account your objectives, financial situation, or needs. It is not personal financial advice. You should consider whether the information is appropriate for your circumstances and seek independent professional advice before making any financial decisions.

National Financial Services (Aust) Pty Ltd holds Australian Credit Licence 451946. All credit applications are subject to lender assessment and approval criteria. Outcomes may vary depending on individual circumstances.

Any examples provided are for illustrative purposes only and are not indicative of future results.