Westwood Conveyancing

Are you interested in increasing your borrowing capacity?

      Boost your borrowing power 

If you have a limit of $10,000 on your credit card, be aware that it will reduce your borrowing power for a home loan by around $40,000.

That’s regardless of what you owe!

A $16,000 car loan cuts your loan amount by $46,000 and a personal loan of just $6000 can see you with $19,000 less. You can play around with the figures yourself on one of the many online borrowing calculators.

(I’ve used comparison site finder.com.au’s calculator for these examples)

Clearly personal debts can have a big impact on how much you can borrow but there are plenty of other things that can hold back your borrowing power. A second car, store cards, pay TV, a third child (I don’t recommend you get rid of that one), the school you send your kids to or what you do for a living can all play a role in how much you can borrow.

What makes things more difficult is that there can be significant differences in how much you can borrow between one lender and the next.

“Every lender has their own set of guidelines and loan-servicing calculations that they use to determine how much you can borrow,” says Terry Hunt, of Smartline Personal Mortgage Advisers. “That’s why some lenders will lend you more than others.”

When it comes to increasing your borrowing power, you have only two levers to play with. You need either to increase your income or cut expenses.

Let’s look at expenses first.

You’re now required to estimate your living expenses to determine whether you’re above or below the average cost of living.

Banks have their own default expense calculator and they will use whichever is the higher estimate.

Personal debts are the most common expenses that affect borrowing capacity. “Finding a way to clear these debts, maybe by selling your car and getting a cheaper one, might be what’s needed to get the property you want,” says Hunt.

If you’re not in a position to clear your debts, explore if it’s possible to consolidate them into your home loan. This is much easier for established home owners who have equity in their existing home loan and are borrowing, say, to upgrade.

If you’re buying a property for the first time, you’ll need a large deposit to be able to consolidate your debts into your mortgage. Either way, you will pay more in interest as you are switching short-term debt into a long-term mortgage.

Another point worth noting is that if you have debt with someone who isn’t an applicant on your home loan, then most banks will assume that you’re making all the repayments on that debt even if its split 50:50.

“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,” says Otto Dargan, the managing director of mortgage broker Home Loan Experts.

On the income side

... it pays to find a lender that favours your circumstances. For instance, casual, contract and full-time employment are treated differently by different lenders.

“A casual employee is considered to be riskier and that can affect their borrowing capacity with some banks,” says Dargan. “Income types such as overtime and bonuses are also assessed in different ways by different lenders. Right now only a few lenders will use this income type and typically a maximum of 80% of that income.”

You also need to be certain that you include all possible income. As Hunt says, “for investors there is rental income plus add-backs for interest cost under negative-gearing arrangements. Dividend income may be considered if you can demonstrate consistency over two years.”

Government benefits are included by some, but not all, lenders. The upshot is that each bank will assess your borrowing capacity in a different way.

“The secret is to apply to the right lender,” says Dargan. Surprisingly, he says, there are lenders who are willing to ignore your credit card limits if you pay off your debts in full each month. “This makes a big difference if you’ve got more than $20,000 in card limits,” he says.

You can see why more than 50% of home loans are now sold through mortgage brokers. A good one should be able to find the right lender for your circumstances. But just remember brokers are salespeople.

While they have most home loans on their books, they don’t have every loan in the market. And always be sure to borrow responsibly.

6 ways to borrow more:

• Lower your credit card limits.
• Get rid of store cards.
• Consolidate personal debts into the home loan that you’re applying for.
• Be sure to include all your income.
• Pick a lender that suits your personal circumstances.
• If in doubt, find a good mortgage broker.

 Please  phone our office today if you would like some help or have any questions

Source  :  http://moneymag.com.au/borrowing-power/

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