Your borrowing capacity is an important consideration when buying a home or an investment property. It will effect how much you can spend on a property.
Your borrowing capacity will vary from lender to lender and it is possible to improve your capacity so you can broaden your property options. Here are 10 smart ways you can increase your borrowing capacity:
1. Know your credit score
Your lender will check your credit score when you apply for a mortgage. Knowing your credit score will help you determine if you’re in a healthy financial situation and if there are any issues with your credit history. This will allow you to start working to improve your score.
2. Reduce your debts
Unsecured debts like credit cards and personal loans are very expensive and reduce the amount you can repay on a mortgage. If you work to reduce your high-interest-rate debts you can increase your borrowing capacity.
3. Reduce excess credit limits
Do you have any unused credit cards? You might want to consider getting rid of them and cutting the limit on any cards you keep, because lenders will consider any credit cards to be drawn to their full limit. As an example, if you have two credit cards, one with a $5,000 limit and the other with $10,000, a lender will write down $15,000 in debt against you.
4. Choose the right mortgage product
When shopping for a mortgage, take time to consider the features of the loan product so you know if it suits your situation. Loan features can impact how much your lender will offer you.
5. Organise your financial affairs
Organising your financial records, including completing your tax returns and having up-to-date information on your income will save you time when applying for a mortgage.
6. Save more money for your deposit
Saving more money for a home deposit can increase your borrowing capacity because lenders look for a consistent saving record. This shows you can make regular mortgage repayments.
7. Cut your expenses
Other than your income, your lender will also consider your expenses such as your rent, utility bills, school fees and childcare costs if you have kids. Trimming your expenses will not only help you save money for a deposit but will increase your borrowing power.
8. Consider splitting liabilities
Rather than buying a property in your own name, why not split the expenses on-paper with your partner? As an example, if you can prove that your partner can and will provide for your dependents financially, they may not be counted as your dependents in the application.
9. Increase your income
Increasing your income is a great way to increase your borrowing capacity. You may want to save your tax return, rent your spare room, or do some extra shifts.
10. Take a longer mortgage term
A 25-30 year mortgage term has been the norm but taking on a longer term of 40 years can reduce your monthly repayments. The longer the loan is, the less the monthly repayments. However, this also means that the total interest you pay over the life of the loan will be higher.
How to calculate borrowing capacity
If you’re shopping around for a mortgage, a borrowing power calculator is a great tool to help you determine how much you can borrow. Keep in mind that a borrowing power calculator will only give you an estimate.