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Check Your Credit Score and Borrow More - Part 7

Heidi Armstrong explains everything about your credit file and how it affects how much your lender will lend to you when shopping for a home loan.

By understanding how your credit file is created and updated, you can make sure you keep it looking good. Heidi also explains how a lender calculates your borrowing power.

The live session is divided into 11 videos, packed with information you need before applying for a home loan in Australia.

Video transcript below:

Part 7 of 11
Check your credit score and borrow more
Heidi Armstrong, Director of Operations, State Custodians
Every lender have their own serviceability calculator and this goes back to what I said before about NCCP, the National Consumer Credit Protection Act.  What that says is, we can’t do a loan for you if it’s not unsuitable, but it doesn’t dictate the terms on what is not unsuitable.  That it’s not restricted, it’s interpreted.  So every lender is trying to interpret the legislation and decide to what’s not unsuitable.  So different things go into the policies that underlie their serviceability calculations and this is just a look at one.  This is one we have used.
What are the policies that underlie a lender’s calculations to determine your borrowing power?
Different things, you can say you know people have said to me, “Heidi I can’t believe that if one lender I can borrow $60,000 more than what I was going to be approved for with another lender.’  And the reason is even though you think my situation is black and white.  This is how much I earn, this is my assets and liabilities, nothing changes when you go one lender or the other.  Let me tell you a whole of things change.  
Base cost of living for each applicant or the dependents which index that they are going to use.  So every applicant that’s applied for the loan, we know you have got a base cost of living and we determine that on either property index or the Henderson index, just depends. Now already before we go any further, you know that there is going to be a difference between lenders.  
The bench mark interest rate, now State Custodians we are here offering, we are offering 5.77% interest rate for people today on our mortgage of the year loan and that has a 5.99% comparison rate.  But we, even though we are offering you a fantastic rate, we are going to load that rate when it comes time for you to apply for the loan and that’s because we know interest rates up as well as down and we need to protect you to ensure that the loan is not unsuitable because if you get into difficulties making repayments in about 3 months time because then interest rates rise, we haven’t done our job.  Now different lenders use different bench mark rates.  Some will load it by 1 ½ %, some by 2%.  So again there is a difference between lenders.
Treatment of income.  You know if you have a low base salary, but you get regular commissions, you want a lender that’s going to factor in those commissions.  But you are going to have to show evidence that it is historically that you have received it consistently and over a fairly lengthy period of time.  

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