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Rethinking your borrowing capacity

Existing homeowners with a mortgage may still be in a position where they need to work out their borrowing capacity.

Understanding when you might need to work out your borrowing capacity and how you can make the most of the circumstances could be highly beneficial to your financial situation.

Change in income

If you've recently been promoted, there's a chance this could come with a healthier paycheck.

Or perhaps you've taken on work on the side, which bumps up your weekly incomings.

Whatever the reason, an increase in your earnings could boost your borrowing capacity.

When you look at mortgage refinance options with your existing loan provider or a potential new lender, you'll need to provide details of your earnings.

Make sure you provide these fresh details of a boost in income - you could discover that you're able to make greater repayments, cutting down the term of your mortgage. Alternatively, you could pump up your borrowing capacity and upgrade to a nicer home.

Use your equity

Your home's equity is its value minus what you owe on it.

So if you've paid off one-quarter of a $500,000 mortgage, the equity in the home is $125,000.

You'll need to work out the property's current market value, then subtract your outstanding mortgage balance to arrive at your own home equity figure.

If you fancy buying a second property - perhaps as an investment - you can take out a loan on the equity you've built up in your existing property.

This is a great loan option for some, but it's wise to understand how it works.

If you've built up $125,000 equity in your property, then you could obtain a mortgage for this amount for a second property - however, the bank doesn't take a security on the second property but on the first.

Make living adjustments

Regardless of why you want to increase your borrowing capacity, sometimes the way you can go about this is as simple as adjusting your outgoings.

If you haven't had a pay rise, or at least one of a significant nature, then you can't offer your lender evidence of a change in income.

However, by adjusting your outgoings with scrupulous budgeting, you might be able to take out a loan to buy a home that better suits your circumstances - for instance, upgrading to a property with an extra bedroom, a larger kitchen or more ample outdoor space.

In order to increase your borrowing capacity, you need to prove to your home lender that you will continue to make your repayments in full and on time.

By skimping on unnecessary items, you could drastically reduce your weekly outgoings.

You could look at changing your takeaway coffee habit, buying groceries in bulk for better deals, opting for seasonal produce and eating out less.

Cutting down your power bill is achievable, too. For instance, switching from hot to cold washes, using energy efficient light bulbs and shopping around for the cheapest power company could help slash your monthly bill so you can afford to borrow more for a new home.

If you do choose to make living adjustments in order to borrow more, it's a wise idea to get into the habit for a few months before approaching your lender for pre-approval for a new mortgage.

The benefit of this is twofold. Firstly, you'll soon discover whether it's realistically possible to lower your outgoings significantly enough. Secondly, you'll be able to demonstrate to your lender that you are able to budget, which may make you a more promising loan candidate.

Rethinking your borrowing capacity could help you buy a self managed super fund investment or move into a better home, so consider your options today.

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This information has been prepared without taking into account your individual objectives, financial situation or needs. You should, before acting on this information, consider its appropriateness to your circumstances.