Increase your borrowing capacity ahead of a loan application.

As interest rates rise, we’re finding that for the first time in a long time, people are often struggling to borrow the amount that they need to settle on purchases.

When you’ve spoken with us in the past, we might have given you a few of the below tips to help increase your borrowing capacity, but we thought that having a list in one consolidated place would be handy, so you know what to do next time you’re looking to purchase or refinance.  

So, our ultimate guide to increasing your borrowing power is as follows:

1.      Negotiating a pay rise? Be careful of bonuses.

Everyone loves bonuses, however they need to be consistent for a couple of years for most lenders to accept them. If you’re in the process of haggling for a pay rise or negotiating a new job, you may be better off with a higher base salary and lower bonuses, given that most lenders will accept the higher base rate after just one pay cycle, rather than needing 2 years of bonuses.

2.      Reduce your credit card limits:

Most lenders will look at your loan application, and assume the shit is imminently going to hit the fan. That is, they inflate the assumed cost of your proposed loans, and also pretend that your credit cards are maxed out. If you have a $10K credit card which is paid out monthly with zero balance owing, many lenders will assume that you’re still paying $360 in interest on the card each month. With the limits on these cards reduced, you’ll find that your borrowing capacity increases significantly.  

3.      Understand your payslip:

You should know what each and every number on your payslip means. You should understand if the figure noted on your payslip is inclusive or exclusive of super, you should know what the deductions are for (and if you can stop them) and also what’s included in your tax. Sometimes your HECS debt won’t be listed as a separate line item on your payslip, and you’ll need to know how much of your HECS is included in your tax withheld figure, otherwise lenders will double dip on the HECS expenses. Depending on how much you earn, this can be the difference of around $800 per month in terms of “usable” income.

4.      Get smart about which debts to pay down.

Sometimes it makes sense to increase your deposit, and sometimes it makes more sense to pay down some debts if your borrowing capacity is the limiting factor (rather than how much of a deposit you have).  You know how we spoke about the shit hitting the fan? It also means that lenders will assume that your debts are ongoing in perpetuity, even if you’re onto your last HECS or car loan repayment. Speak to us and get smart about which debts to clear and which ones to leave.

5.      Stop the salary sacrificing.

Salary sacrificing can be a really handy tax effective means of obtaining something through your workplace, however not all lenders will accept that your salary sacrificing is voluntary. Understand your salary sacrificing, whether its voluntary, and whether you could stop it if you wanted to.

6.      Dial back the living expenses.

Understand exactly what you spend per month, and what you save per month. Not only will this help you understand what your budgeting will look like once you’ve started making home loan repayments, but if you’re actively spending less it will improve your borrowing capacity. Some costs are unavoidable, but most people who budget end up finding ways to trim the fat and increase their borrowing power in doing so.

7.      Understand how the bank views your investment property.

If you have an interest only loan on your investment property, it would follow logically that your borrowing capacity would increase as a result of not having to pay the principle portion and thereby having more money in your pocket. However, the figure that lenders use as the repayment is not what you actually pay, but what the loan reverts to once the initial interest only period has expired. Given that this condenses the P&I repayments into a shorter loan term, interest only loans can actually diminish your servicing capacity, despite them resulting in more cash in your pocket in the real world. Don’t just get an interest only loan for the sake of it, make sure it ties into your overall investment strategy.

8.      Get a guarantor.

If you’re a first home buyer, the limiting factor to how much you can borrow is most likely not to do with how much money you earn, it’s probably related to the size of your deposit. One handy way around this is to get your home loan with a guarantor. This circumvents the need to have a large deposit, and usually means that you can afford more expensive homes than if you’re relying on a deposit alone. Not all lenders offer guarantor loans, and you still need to be able to afford the loan without any repayment contributions from the guarantor, but it can be a handy way of getting onto the ladder faster.

9.      Don’t rely on online calculators to tell you how much you can borrow:

Most lenders websites will have a simple borrowing capacity calculator that will give you an idea as to how much you can borrow. The problem is, that idea is often the wrong idea. They don’t really take into account bank policies, and these calculators are not the same ones used by the credit assessment team. Take all those figures you see online with a large grain of salt. Speak to us instead, and we’ll let you know how the credit assessment team will actually treat your income. 

10.  Understand which government schemes you may be eligible for.

With the various government schemes available for first home buyers, you can get some absolutely cracking deals on purchases. These don’t just help you get in the door, but in the case of the First Home Guarantee scheme, you can avoid LMI completely, saving you tens of thousands over the course of the loan. Given that these schemes often lower the deposit barrier, it also means that you can get more, for less deposit.