Changes to borrowing power calculation due to COVID-19

In light of the coronavirus (COVID-19) pandemic, lenders have temporarily reduced what percentage of certain incomes they’ll use when calculating your borrowing power, namely unusual employment.

  • Casual income: Some lenders are only willing to use 50% of your casual income whereas other lenders are using the lower figure between your current payslip and the average income for the last 6 months.
  • Overtime income: 50%-70% of the overtime income. A select few lenders can consider 80 % of this income for borrowers not affected by COVID-19, e.g. essential service workers.
  • Commission and bonus income: A lot of lenders are only using 50%-70% of commission and bonus income in the borrowing power calculation. Only a few lenders are still using 80%.
  • Dividend income: 60%-80%. Only a couple of lenders will use 80% of your dividend income in the borrowing power calculation.
  • Rental income: 70%-80% of the verified gross rental amount. However, some lenders are no longer accepting holiday and part property rental (such as Airbnb, individual room rental, holiday rentals etc.) due to impacts of COVID-19.

Other income types are more or less treated the same as before.

To find out how much you can borrow in this new environment, talk to one of our specialist mortgage brokers by giving us a call on 1300 889 743 or by filling in our short no-obligation assessment form today.

One would expect that with lenders tightening their lending policies as a reaction to the adverse economic effect of the novel coronavirus pandemic, one’s borrowing power would decrease as well.

Interestingly, that is not the case for everyone. In fact, borrowers with stable employment and income have seen an increase in their borrowing power. It has to do with changes made last year in assessment rates.

Increased borrowing power due to change in the assessment rate

Last year, APRA removed the floor rate of 7.25% and allowed banks to use their interest rate plus a 2.5% buffer as their assessment rate going forward.

Since the removal of the floor rate, whenever interest rates drop, your assessment rate drops too, basically, enabling you to borrow more.

Your borrowing power is now being assessed at around 5.50%-5.75% (on average) instead of 7.25%.

Let’s look at an example.

A single borrower earning $90,000 p.a. could only borrow up to $536,518 for a 30 year P&I owner-occupied home loan being assessed at 7.25%, assuming no existing debt for simplicity.

Whereas, now the same customer is assessed at 5.75%, allowing him or her to borrow up to $627,171.

This has effectively increased your borrowing power by as much as $90,653 or 16.89% compared to last year.

Our borrowing power calculator has been updated to take this and other small changes into account.

How to increase home loan borrowing power?

Here are 11 practical tips to increase your home loan borrowing power:

  • Close or reduce your credit card limits. This is the easiest way to increase your home loan borrowing power.
  • Close unsecured debts such as personal loan, car Loan, HECS etc. If you have adequate savings to repay the debts, this will enable you to maximise your borrowing capacity.
  • Reduce your living expenses for 3 to 6 months before applying for a home loan.
  • Apply for a longer loan term on your home loan. E.g. the amount you can borrow increases with a 30-year loan term than on a 25-year mortgage. Some lenders even offer a 40-year loan term.
  • Consider a fixed-rate home loan as this allows you to get assessed at a lower assessment rate.
  • Change repayment to interest-only and go with a lender who considers actual repayment figures. This is only recommended if, after the completion of the interest-only period, you can make the principal and interest repayments comfortably.
  • Apply with a lender that has a favourable lending policy for your income/employment type. E.g. some lenders will only use 50% of your bonus or overtime income to calculate your borrowing power. Whereas other lenders will use the full bonus or overtime income. As always, applying with the right lender is key.
  • Split your expenses with your ex-partner. For example, if you have two children, they may be classed as your dependents. But if you can prove that your ex-partner provides for them financially, then the banks will lend you more.
  • Consolidate unsecured debts into your existing mortgage to increase your home loan borrowing power.
  • Rent out your property instead of living in it. This allows you to use the rental income and negative gearing benefits in the borrowing power calculation, giving a significant boost to your borrowing power.
  • Check your credit report. Having a clear credit report means you qualify with more lenders and are not assessed at a higher assessment rate, giving your home loan borrowing power a small boost.

How can we help you get approved for the amount you need?

A simplified process to try to solve a loan scenario where your borrowing power is the main issue goes something like this:

  • First, we try to find a lender from our panel of almost 40 lenders that can do it within standard policy.
  • If no lender can do it, then we try to get one to make an exception to the policy.
  • If no lender can make an exception to policy, then try to change the customer’s situation (e.g. buy a cheaper home / ask employer to waive probation). E.g. if you cancel your credit cards then you can borrow x amount.
  • Finally, if a change in situation is not possible, then we’ll tell you what you need to do to qualify in the future and follow up with you.

To find out how much you can borrow amidst COVID-19, speak with one of our specialist mortgage brokers by giving us a call on 1300 889 743 or by filling in our online assessment form today.