Your borrowing power and borrowing capacity will depend on your income, family size, location, current debts, type of loan and the lender that you choose.
There are a number of things that you can do that will improve your borrowing power.
Should I cancel my credit cards?
If you have unused credit cards, it is best to cancel them.
Lenders take credit cards into account when they calculate how much you can borrow regardless of whether they are being used or not!
If you do have credit cards that you use, then reduce the limit. By reducing the limit on you credit card you’ll improve the amount you can borrow on your home loan.
Whilst there are some lenders that will ignore any credit cards if they have been paid off in full for three months in a row, most lenders assume that your credit cards will be fully drawn to their limit.
They do this because there is a possibility that some people will use their full credit limit in the future.
If credit card debt is impacting your borrowing capacity talk to one of our specialist brokers today. Call us on 1300 889 743 or fill in our free assessment form.
Consider a fixed interest rate
The majority of lenders usually add at least a 1.5% buffer on top of the standard variable interest rate. This new rate is the rate the lenders will assess your loan against.
For example, you want to borrow $500,000 and the current standard interest rate is 7%. A lender will add the 1.5% buffer and assess your loan repayments at 8.5%.
The buffer is what lenders use to mitigate the risk of interest rates rising. The resulting higher assessment rate can greatly reduce your borrowing power.
By choosing a three year fixed interest rate, the assessment rate changes.
When you’re applying for a variable interest home loan at 7% then the lenders are assessing your repayments at 8.5% (using our example). However, if we have the interest fixed for three years at a fixed rate of 6% then they will assess you at the three year fixed interest rate.
In some cases, lenders may still include a buffer, but it’s not as big.
This can make a huge difference!
However, you should note that it is only applicable with some lenders.
Our mortgage brokers are experts in fixed home loans. Contact us today by completing our free assessment form or calling 1300 889 743 to find out how much you can afford to borrow.
How can I consolidate my debts into my mortgage?
Unsecured debts often have a higher rate of interest and can impact your borrowing capacity.
Consolidate any debt that have short repayment terms with expensive monthly repayments. These debts can include both personal loans and credit card loans.
Unsecured debt limits the amount of uncommitted funds you have available to repay your proposed mortgage. It also doesn’t look good to the lenders.
If you’re refinancing your current home loan, you can roll your personal loan or other debts into your existing mortgage. This will help your cause, as they will no longer show as other financial commitments.
This will stretch the debt over the life of your loan, attracting interest in the long run.
If you’re buying a property then you’ll need to have a large deposit to be able to consolidate your debts into your mortgage.
Do financial records affect how much you can borrow?
If you’re self employed, then not having your financial information up to date can be detrimental to how much you can borrow.
When it comes to borrowing power, banks assess your most recent two years tax returns. They look at your financial statements to make sure that your business is stable and that the wages you’re paying yourself are sustainable.
By keeping good financial records you’ll also be more aware of where your money is going and what it is doing. This enables you to plan for the future of your business and budget for your new mortgage repayments.
If you don’t have up to date tax returns then you can consider applying for a low doc home loan which has more flexible lending criteria than a standard home loan.
If a lender sees an outgoing company debt that you may not have considered as a liability then they may think you’ve intentionally not disclosed information to them. This can result in your loan being declined by the lender.
This is why more self employed people choose to go through a mortgage broker. We can filter through all the information and make sure that you have all the relevant financial records to show to the bank. Complete our free assessment form or call us on 1300 889 743.
Which bank should I choose?
Did you know that each bank will assess your borrowing capacity in a different way?
If you’re in one of the following situations you’ll find that the banks will all lend you different amounts:
- Investors: Banks assess rent income and negative gearing benefits in very different ways.
- Existing mortgages: Some lenders use a high assessment rate for your existing loans, whereas others do not.
- Large families: If you have more than two adults or three children in your household then each bank will assess your living expenses in completely different ways.
- Many credit cards: The method of calculating the repayments on your credit card limits differs between each bank.
In particular people with many investment properties have huge variations in how much they can borrow between different banks.
Which home loan should I select?
Choosing the right loan can have a large impact on your borrowing power.
Lenders all use different assessment rates for different loan types. In particular if you have an interest only period with your home loan then some lenders will assess your repayments over a shorter loan term, which reduces the amount that you can borrow.
They do this because if you have a 30 year loan with a 5 year interest only period then after 5 years you have to pay the loan off over 25 years with higher than normal repayments.
However with other lenders they will use the actual interest only repayments in their assessment.
Typically this is only for your existing mortgages, not for new loans that you’re taking out. As a result people with several properties already can borrow much more with these lenders.
Shop around and talk to one of our mortgage brokers to find out the best product for you. Complete our free assessment form or call us of 1300 889 743.
Will the bank accept your income?
Lenders can be very selective when calculating how much you can borrow. Casual, contract and full time employment are all treated differently by different lenders.
Even though a permanent employee and a casual employee might earn the same, the lender has to take into consideration the casual worker taking unpaid sick days or annual leave.
A casual employee is considered to be riskier and that can affect their borrowing capacity with some banks.
Income types such as overtime and bonuses are also assessed in different ways by different lenders.
For example if you’re a shift worker who earns a significant amount of overtime then you may find that one lender uses only half your income whereas another uses the actual amount that you earn.
This is why you should consider going with a mortgage broker. We can help you to find a lender that will assess your full income. Please Complete our free assessment form, or call us on 1300 889 743 to find out what we can do for you.
Does your ex-partner pay child support?
One method to increase your borrowing power is to split your expenses with your ex-partner. For example, if you had two children they may be classed as your dependants.
If you can prove that your ex-partner provides for them financially, then the banks will lend you more.
When determining your borrowing power some lenders will also consider Family Tax Benefits A & B depending on the age of your children.
Do you share a debt?
Did you know that if you have a debt with someone who isn’t part of the new loan application, then the banks will assume that you’re making all of the repayments on that debt?
For example, you have a $20,000 car loan that you took our with your partner and you alone are applying for a home loan with a bank. Most banks will calculate your borrowing capacity as if the $20,000 personal loan is yours only.
In other words, they assume your partner isn’t making any repayments on the loan.
With some banks, if you can show that the other person is able to cover their half of the repayments, then the lender will only take into account your share of the debt. This will result in a greater borrowing capacity.
To find out which lenders can help, please contact one of our mortgage brokers by filling in our free assessment form, or calling us on 1300 889 743.
Do living expenses impact my borrowing capacity?
Lenders treat living expenses differently when calculating your borrowing power. For big families, this makes a big difference.
In 2012, most lenders switched to the Household Expenditure Method (HEM) for calculating your living expenses. This offers a more realistic figure for living expenses than the Henderson Poverty Index (HPI) which was used prior to 2012.
Some lenders also take into account the area that you live in. This means that borrowers who are living overseas and people who live in country areas may not qualify for as large a loan as people in capital cities.
You’re now required to estimate your living expenses, to determine whether you’re above or below the average cost of living. The bank will use your minimum living expenses as estimated by the HEM or your estimate, whichever is higher.
Be careful when estimating your living expenses as some banks will assume that your estimate doesn’t include expenses such as private school fees, pay television, private health insurance and gym memberships.
So if they see these expenses in your bank statements they’ll then add them as a commitment in their serviceability calculator.
In other words they are accidentally counting these expenses twice!
If you do have additional expenses such as gym membership then some lenders can exclude these expenses if you confirm to them in writing that you’ve chosen to discontinue your membership.
The minimum living expenses for large families can vary significantly between lenders. In most cases, living expenses will increase with each additional person in the household. However with some lenders there is a cap on the living expenses, which favours larger families.
Contact one of our expert mortgage brokers today to find out how we can help you improve your borrowing power. Complete our free assessment form or call us on 1300 889 743.
Can I extend the term of my mortgage?
The longer the loan, the lower your repayments. You’ll pay more interest on your loan in the long term, however your repayments are stretched out.
Whilst 30 year loans are normal in Australia, you can get 40-year mortgages with some lenders. This can increase your loan borrowing capacity because the repayments are lower with a 40-year loan.
Consider that the amount that you can borrow reduces as you reduce the loan term, however the interest you pay also reduces.
We often recommend that you take out a longer loan term to improve your borrowing power and when your income increases at a later date you can increase your repayments to pay off your loan well before the agreed 40-year term.
To find out what options would be best for your circumstances please fill in our free assessment form or talk to one of our mortgage brokers on 1300 889 743.
Rent out your property
If you currently own a property, one option is to rent out the property instead of living in it. Your borrowing capacity will increase due to the rent income and negative gearing benefits!
If you’re buying a property that is outside your price range then you can also consider renting it out until you can afford to live in it yourself.
Even if you’re currently paying rent at the moment, you’ll find that you have a higher borrowing capacity by continuing to rent and buying an investment property.
The answer to ‘How much can I borrow for an investment property?’ can vary greatly between lenders due to their treatment of rental income and negative gearing benefits.
The method that the banks use to calculate how much tax deductible interest you can claim is either the one used by the Australian Taxation Office (ATO) or is more conservative. So you may find that one lender is able to lend you much more than another.
You can move into the property at a later date when your income has increased or when you’ve reduced your debts.
What is a positive surplus?
Most banks will want a minimum surplus of one dollar per month after your debts are paid and your living expenses are budgeted for. In order for you to meet serviceability, you’ll need to be one dollar positive on your surplus.
The minimum surplus is just that, the minimum. It shows that you have sufficient borrowing capacity and that you meet the policy of the lender.
However, if you’re borrowing 95% of the property value or have a large amount of debt then lenders look for comfort that you have a higher surplus than just one dollar each month.
To find out how we can help you with your surplus contact one of our knowledgeable mortgage brokers by either fill in our free assessment form or calling us on 1300 889 743.
Save, save, save!
When considering a home loan, it is best to build up as much deposit or equity as quickly as possible. Be sure to save for at least three to six months depending on the lender.
Set up a budget to help you save as quickly as possible. By showing a savings track record you can prove yourself to be a lower risk than a borrower that doesn’t have any savings or who is obtaining a gift as a deposit.
Can you afford the loan?
When considering a home loan, you must ask yourself ‘can I afford the loan?‘. Just because a bank can offer you a loan, doesn’t mean that you can afford it. You can only calculate your own cost of living, which varies from person to person.
We don’t recommend that you borrow to your limit unless you have an income that the banks aren’t including in their assessment or unless your situation will improve.
This can include financial help from your parents, your income is likely to increase in the near future, you have unusually low living expenses, or you’re an investor who has a strategy to continue paying interest only on your debts.
To discuss what home loans you can afford, and suit your circumstances complete our free assessment form or call us on 1300 889 743.