With the current upswing in interest rates, it’s important for buyers to know how they can boost their borrowing capacity without stretching their budgets.
Whether you’re looking to buy your first home or upgrade to larger digs, you need to get your financial health in order before you even begin flicking through listings online or in your local newspaper. Your finances can determine exactly how much you can borrow for your new home. Here are some ways you can maximise your borrowing power without straining your daily budget.
- Look over your credit limits
- Polish your credit rating
- Pay off your existing debts or consolidate them into a single loan
- Check your expenses
- Consider the type of loan
- Beef up your savings
Look over your credit limits
When applying for a home loan, having multiple credit cards might put you at a disadvantage. If you own three credit cards with a limit of $15,000 each, the lender could consider a potential loan of $45,000 on your hands, significantly reducing your borrowing capacity.
While this may not seem fair, most lenders prefer to err on the side of caution, as it is only human to dip into the amount that is so easily available to you.
Giving up that extra credit card will save you the annual maintenance fee as well as help you avoid high-interest credit that can burn a hole in your pocket.
Polish your credit rating
Another easy and effective way to increase your borrowing capacity is to maintain a clean credit history. Paying all your utility bills on time (even the most inconspicuous ones) makes you a responsible borrower in the eyes of a potential lender and can increase your chances of approval as well as your borrowing capacity.
It is a good idea to pull out your credit file from providers to know and resolve any issues you might have on your record.
Pay off your existing debts or consolidate them into a single loan
Having lots of debts on your file can have the lenders raising their eyebrows. Why not roll up all the smaller debts under a single loan? It would even streamline your payments and help you budget better.
Consolidating debts into a single loan will also make it convenient for you to pay them off. Refinancing at a better rate by bringing all your loans under the refinanced loan can save you a lot of bucks over the life of the loan.
However, you should be careful about loan consolidation and ask your trusted broker how much you can really save.
Check your expenses
It is important to calculate your living expenses clearly before you file a loan application, as lenders will take this into account for determining the amount they will lend you. School fees for your children, any repayments for an investment property (many lenders assume the worst-case scenario that the property may remain vacant for some time), and the expensive club membership are all considered when determining your repayment capacity and consequently, your borrowing capacity.
It is also a good idea to check your borrowing capacity based on existing expenses and start your property search accordingly.
You can try to calculate how your expenses will impact your capacity using our Borrowing Power calculator.
Keep your financial records
Keep your financial records up-to-date and don’t just rely on your previous month’s salary slip. Supplementing your application with proof of any bonuses or overtime you regularly receive, rental and other income from investments can significantly affect the assessment of your financial position by a prospective lender.
Presenting an application with organised and complete paperwork saves a lot of time and unnecessary going back-and-forth with the bank as well.
Consider the type of loan
The type of loan you have applied for can have an impact on the amount you can borrow. Lenders always calculate your repayment capacity at an interest rate that is approximately 3% higher than the rate at which the loan is being offered. However, when you go for a fixed-rate loan, the repayment capacity for that period is usually calculated without any buffer.
Also, if you apply for a loan jointly with your partner, more often than not, you can borrow more than what you would have as a sole applicant.
Beef up your savings and deposit
Most lenders require a record of genuine savings over a period of at least three months before they approve your loan. Further, having a good amount as a deposit means you pay lesser Lenders Mortgage Insurance (LMI) or none at all if you have saved a 20% deposit.
Taking advantage of the First Home Owners Grant offered by state and territory governments can further boost your savings as it will supplement the amount you pay upfront for the house. Additional stamp duty concessions are available for first home-buyers that can save up some cash to supplement your deposit amount.