The Hidden "Killers" of first home buyers borrowing capacity (and how to fix them)
- Orca Home Loans
- Feb 6
- 4 min read
You’ve saved the deposit. Your bank statements look clean. You’re ready to buy. But when you sit down with a broker, your borrowing capacity comes in $100,000 lower than expected.
Why?
It’s often not your income that’s the problem, it’s what we call "liability drag". Lenders don't just look at what you owe; they look at what you could owe. In 2026, with interest rates where they are, small debts can have a massive, disproportionate impact on how much a bank will lend you.
Here are the four biggest borrowing capacity killers and how to manage them before you apply.
1. Credit Cards
Most people assume that if they pay off their credit card in full every month, it doesn't affect their loan. This is a myth.
Lenders assess your credit card based on its limit, not your balance. They assume you could max out that card tomorrow and will be stuck paying it back at 20%+ interest.
Potential Impact | Options to minimise impact |
As a simplified modelling example:
Actual impacts vary significantly by lender and scenario. |
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2. HECS/HELP Debt
The "good debt" of education is often the silent killer of mortgage applications. Lenders view your HECS repayment as a non-negotiable expense that comes out of your pay before they even see it.
Potential Impact | Options to minimise impact |
A borrower earning $90k with HELP repayments may have borrowing capacity tens of thousands lower than someone on the same income without the obligation. |
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3. Car Loans
Car loans are treated harshly because the repayments are usually high relative to the loan size.
Potential Impact | Options to minimise impact |
A $600 monthly repayment may reduce borrowing capacity by approximately $70k to $110k depending on assessment assumptions.
This would occur even if the outstanding balance totalled $15k. | If you have the financial means, you may consider reducing your deposit by paying out the debt. In the example provided, paying $15k to clear the debt could improve borrowing capacity by up to $110k.
If you can't pay it out, strategies to explore include debt consolidation which could allow you to move the debt to a loan with a lower interest rate and longer term. This would likely lower the monthly repayment and by implication improve your serviceability despite having to pay more in interest over the term of the loan. |
4. Personal Loans & "Buy Now, Pay Later"
Personal loans are unsecured, meaning they carry higher interest rates. Lenders stress-test these debts aggressively. Even small "Buy Now, Pay Later" (BNPL) accounts can be a red flag if they show a pattern of spending more than you earn.
Potential Impact | Options to minimise impact |
Similar to car loans, every dollar committed to a personal loan repayment reduces your mortgage capacity by a multiple of roughly 5 to 6 times. | Prioritising the clearance of these debts before application is often the most effective way to boost capacity. They are the most expensive form of debt and the biggest drag on your application. |
Final thought for first home buyers
Lenders consider a lot more than simply income when determining borrowing capacity for first home buyers.
Understanding how your existing loans interact with lender models can materially change your borrowing capacity and by implication the types of property you can afford.
Do you have debts that are killing your borrowing capacity?
Book a Loan Strategy Session with Orca Home Loans today, and let’s consider the best path forward for you.
Frequently asked questions
1. Does my credit card affect me if I pay it off every month?
Yes. Lenders assess the limit, not the balance. A $10,000 limit reduces your borrowing power significantly, even if the balance is zero.
2. Should I pay off my HECS debt before applying?
It depends on your deposit size and circumstances. Paying off a small HECS debt (e.g. $5k-$10k) can boost your borrowing power by $50k+, but only do this if it doesn't leave you short on your deposit.
3. How much does a $500 monthly car repayment reduce my borrowing power?
As a rule of thumb, a $500 monthly commitment can reduce your home loan borrowing capacity by roughly $50,000 to $80,000, depending on the lender.
4. Does "Buy Now, Pay Later" count as debt?
Yes. Most BNPL providers now report to credit bureaus, meaning lenders can see these active accounts on your credit file as well as your bank statements. While some treat them as living expenses, others view them as credit commitments that reduce your capacity.
5. Will closing my credit card immediately increase my borrowing capacity?
Yes, but you need proof. Once you close the account, ask the bank for a formal closure letter. Your mortgage broker will need this to prove the limit is gone.
6. Do all banks calculate borrowing power the same way?
No. Different banks have different servicing calculators. Bank A might lend you $800k while Bank B only offers $720k for the exact same scenario. This is why using a broker is critical.
Disclaimer: The information in this article is general in nature and does not constitute financial advice. It is for illustrative purposes only and does not take into account your individual objectives, financial situation, or needs. Borrowing power figures are estimates based on typical lender calculators as of February 2026 and vary significantly between institutions. You should seek professional advice before making any financial decisions.
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