When it comes to investing in property, it pays to review your finances. We explain what lenders look for and how to maximise your borrowing capacity.

You've saved a deposit, found the perfect property and are ready to buy. Now comes the tough decision: how much should you borrow?

Deciding how much to borrow for the purchase of a new home is a major decision. It can make a big difference to your lifestyle, finances and future plans.

Senior Product Manager at ANZ Mortgage Group, Greg Bussell, says that one of the most important factors a lender considers when approached by a potential borrower is whether they can afford the repayments. "The greater the uncommitted monthly income, or UMI, a borrower has, the larger their borrowing capacity overall.

"Lenders review all income and expenditure sources, add a margin for safety, and then calculate a borrower's uncommitted monthly income. For a borrower to increase their UMI, and therefore their borrowing capacity, they need to decrease outgoings by reducing expenses. One way of doing this is to rearrange any existing debts," Bussell said.

Consolidate debt

Mr Bussell believes many borrowers can increase their borrowing capacity by decreasing credit card or personal loan debt. This can be done by closing accounts or consolidating them into one, perhaps under an existing home loan. "This will increase UMI and allow for a larger borrowing capacity when applying for a loan."

He adds that while budgeting, or spending less money on entertainment, restaurants and other activities will increase your UMI, it does not always add to borrowing capacity. "Lenders look at the cost of living for different types of borrowers. From this work, they set minimum expense standards, so there are limits to how much UMI can be improved by reducing expenses.

One way to find out whether you can afford a larger loan, is to find out what the repayments would be, and save that amount each month, over a six to 12 month period. The amount saved can be added to your deposit, and it will prove your capacity to meet repayments of that size.

Include potential rental return

Property investors can also factor into their income the potential rental payments from their investment. "This can help you borrow more in that it increases your uncommitted monthly income," Mr Bussell said. "Lenders generally allow up to 75 per cent of rent towards a borrower's income, while the remaining 25 per cent is set aside for expenses." This means if the investment property has a weekly rent of $100, $75 of this will be added to your income, with $25 allocated to costs such as fees, rates and the times when the property is empty.

Choose the investment wisely

Investment location and type of property are just as important as income when it comes to property investments. "Most home loan lenders will only lend against residential land or residential property," Mr Bussell said. "And people need to do their homework when deciding on where and what type of property to buy. For a standard residential property, the LVR or loan-to-value ratio is generally 95 per cent. If it's a unit in a high rise development that is less than 50 square metres or a residential property in a fringe suburban or rural area then the LVR will be much lower."

When negative gearing

Residential property investors who plan to negatively gear often use a strategy of borrowing more than the value of the property, in some cases up to 110 per cent. "In order to do this, they have to have equity in an existing property, and give that property as top up security in addition to the property being purchased."

Mr Bussell adds that investors always need to be aware of the areas they are buying in and be able to satisfy themselves that the area they choose is a good investment.