The Current Situation
As the world ushers in the new year, inflation is a problem that still won’t go away. Food and energy prices are soaring all around the globe, and Australia is no exception. Last year, inflation reached its highest rate since 1990, at 7.3%. While it did drop to 6.9% in the third quarter of the year, holiday-season shoppers were expected to spend $23.5 billion, which may have pushed up the inflation rate again in the fourth quarter. An increased inflation rate diminishes people’s real income, as the cost of living soars.
The RBA has been trying to tackle this problem by increasing the cash rate. It raised the rate from 10 basis points to 310 points in 2022. With banks passing rate rises to customers, it has become more expensive for Australians to get a home loan now than at the beginning of 2022.
With the erosion of real income, serviceability assessment has also become more challenging for people who want to buy a home. Borrowing power is at least 20% lower than it was six months ago, because interest rates and living expenses have increased. Let’s go through 10 ways you can strengthen your borrowing capacity if you are looking to buy a home this year.
10 Ways To Increase Your Borrowing Power In 2023
1. Have control over your living expenses. If you want to purchase a home in 2023, consider cutting down on extravagant splurges. You can increase your borrowing power by reducing your living expenses for at least three to six months before getting a loan. Cutting groceries, subscriptions and other small costs make a difference. You can make a budget for all your expenses and use mobile applications to keep track of your spending.
2. Have a minimum of 5% of the purchase price in a savings account in your name for at least three months.This shows lenders that you are financially responsible.
3. Try to reduce the number of unsecured debts, like credit cards and personal loans. Having too many credit cards makes the lender think you’re likely to overspend. Reducing your credit-card limits also allows you to borrow more. For every $10,000 you have in credit-card limits, your borrowing power is reduced by around $40,000.
- Avoid credit enquiries by not taking out payday loans and other personal loans, as these substantially affect your credit file.
- Do not rely too much on ‘buy now, pay later’ services.
- Having multiple pre-approvals through different lenders at the same time also lowers your credit score.
- Understand if you’re under mortgage stress. If you are, take action immediately. You do not want to risk a default on your mortgage.
5. Pay your existing loan on time. Every bank uses comprehensive credit reporting these days, and even if there are just one or two missed payments, they will be reflected in your credit report for two years. This has a direct impact on your credit score. A lower credit score would mean higher interest rates and the risk of being rejected by lenders.
6. Have a stable job. Having a stable job helps appeal to lenders, especially when rates are expected to rise and lenders want to ensure that you can continue to repay following interest rate hikes. People with high incomes and stable jobs will be in the best position to buy in 2023.
7. Know what type of property you are buying and be upfront with the broker. For example, if you are looking to buy a large hobby farm, then there is no point getting pre-approval from ANZ, but getting one from Commonwealth Bank would be better. Knowing what you want will help brokers find the best group of lenders for you.
8. Have proof for additional income. If you have a fluctuating income, such as commission, bonuses or casual employment, then have a one- or two-year history of your income to help the lender include it when assessing your serviceability.
9. Different banks allow you to borrow different amounts. The best lender for you depends on your living expenses, income type and whether the property is a home or an investment for you. Some lenders also calculate repayments on outstanding liabilities differently, and this can affect how much you can borrow.
10. Speak to a mortgage broker. Brokers have experience handling cases with unusual situations, so they identify the specific lenders that can cater to your needs and find the best deals for your situation. For them, just because one lender says no doesn’t mean that others won’t say yes, and they have access to many lenders.
- When you get pre-approved, your borrowing power is assessed at that time. But if rates go up before you buy, some banks will reassess how much you can borrow and give you less than what you were approved for at first.
- The possibility of rates increasing can be scary. Most lenders assess how much you can borrow with the assumption that rates will go up another three percentage points, so it’s unlikely they’ll approve more than you can afford in the future.
Let Our Experts Help You
We have a great team of experts who are willing to find you the best rates or even answer your questions if there is anything you’d like to know regarding your borrowing capacity or home loans. Call Home Loan Experts at 1300 889 743 or complete our free assessment form, and we’ll get back to you as soon as possible.