November 09, 2017
Before you think about taking out a home loan, you should know how to maximise your borrowing potential.
When applying for a mortgage, there are several factors to take into consideration. There's common sense stuff like your income and existing debt to be calculated.
There are also things that you may not have considered or even heard about. But these factors could increase your loan capacity. If you want to take your borrowing power to the next level, read on to find out how.
Don't bite off more than you can chew
Living beyond your means is a common trait for many Australians. But it won’t serve you well when needing a loan.
Borrowing potential is based on your ability to re-pay the loan. It's important to know your income structure so you can be clear about how much you can realistically re-pay each week. Full-time workers are more likely to secure a loan than casual employees because they have greater job security.
Before you apply to borrow, know your living expenses and what you can reasonably afford to pay back each week. Think about your daily, weekly, monthly and annual costs. Are there are any you could cut out? Small sacrifices made many times over could mean big savings which could be put towards your savings or loan repayments.
How low can your credit card limit go?
Did you know that your credit card limit is considered an owed amount of money, even with a zero balance? Let's explain this.
If your credit card limit is $10,000 and you've charged $2,000 worth of items (meaning you now owe the bank $2,000), lenders consider your debt to the bank to be $10,000.
It may seem a bit unfair but the reality is that $10k limit means you may max out that line of credit at any time, which then becomes a real $10k debt.
A higher credit card limit might give you freedom. But when you're trying to take your borrowing to higher levels, it's best to reduce your limit to the minimum requirements.
If you like the security that a credit card can offer for emergencies, ask for your credit card limit to be reduced. Talk to your broker or lender about low interest card options.
Minimise personal loans
The more debt you have, the less you’re able to borrow. By eliminating personal loans and credit card debt you can save money on interest and reduce your repayment commitment.
One strategy you can try is to use your savings to pay off as much debt as you can before you get your mortgage application together. It’s important to go cautiously because if you use your savings to pay off debt, you might eat into your carefully saved deposit.
In this situation, you should speak with a broker who can help figure out your borrowing capacity and if it’s better to pay out the debt or keep the extra savings as deposit. Every scenario is different and that’s why it makes sense to talk to a mortgage expert.
Build a better loan structure
The structure of a loan relates to how much you will repay and over what period of time. There are two parts of a loan to be paid. There’s interest which is what the lender charges for lending you the money. And then there’s the principal which is the amount you are borrowing.
Depending on the loan structure, you can pay part of the loan using interest-only or using principal and interest (P&I) payments.
Your borrowing capacity is increased by opting for P&I repayments. Each repayment is higher than for an interest-only loan so you pay off your debt more quickly. Banks look more favourably on P&I borrowers because they get their money back sooner. Buyers who are owner-occupiers benefit from a P&I structure because they build up equity more quickly which can be useful in the future.
Mortgages can be structured with a combination of interest-only and P&I repayment periods. It’s best to speak with a broker who will go through all the options and find the one that meets your needs.
Don't put all your eggs in one basket
Using multiple lenders to amplify your borrowing capability can allow you to take advantage of a multitude of loans offered by different lenders. It means you can get the pick of what many lenders offer, rather than being limited to what one has. And by spreading your debt, you’re not at the mercy of a single lender who may limit future borrowing capacity. Plus, access to equity is likely to be easier.
A diversified lending approach is a complex strategy. It pays to use an experienced broker to guide you through the process and advise if it’s right for you.
Learn more about how to boost your borrowing potential - get in touch with us today.