How to Increase Borrowing Capacity for Your Home Loan
If you’re considering buying a property in Australia, you’ve probably heard the term ‘borrowing power’. Well, what is your borrowing power, why does it matter, and how do you increase it?
Essentially, your borrowing power, or capacity, affects how much money the lender will offer you to buy a home. Therefore, your borrowing capacity will significantly impact the type of house or apartment you can buy.
Whether you want a home in Oz or an investment property to rent out while away, you need to consider how your borrowing power will affect your house hunt.
What is Borrowing Capacity and Why Does It Matter?
Borrowing capacity is a calculation that indicates the amount of money a lender will offer you to purchase a property. You’ll hear the term ‘borrowing capacity’ on home loans.
The lender uses your age, income, expenses, existing debts, job status, dependents, deposit size, and other factors to consider your risk level. Typically, the greater the risk (i.e., less likely to pay back your mortgage each monthly payment), the lower your borrowing power. To improve your borrowing capacity, decrease your risk level.
Lenders will also look at your other debts, such as credit card debt and other unsecured debts. The more expenses you have, the less likely you will be able to meet your monthly payments. Therefore, the lower your borrowing power.
Once the lender has calculated your borrowing power, they will give you an estimated figure that you can use to budget for your property purchase. If the home loan amount is lower than you expected or desired, there are ways to increase your borrowing power.
It’s best to find out your borrowing capacity before looking at houses to know what you can afford.
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What Affects Borrowing Power?
Many aspects of your life affect your borrowing capacity, including:
- Income: Lenders want to know that you have the financial ability to meet your home loan monthly payment. Taking your income into account is one of the most critical factors in your home loan application. They will weigh up whether you have the means to meet your obligations on your current salary. Note that some professions are offered better deals because of their high earning status.
- Living expenses: Once the lender knows how much money you bring in each month, they will want to know how much of it you spend. If you’re a high earner with high expenses, your borrowing capacity may not be as great as you expect. This includes food, rent, travel, and other day to day expenses. Make sure you get your financial records and bank statements organised to prove your living expenses.
- Debt: Debt is another crucial aspect. You must tell the lender of any loan debt you may have in order for them to gain a complete understanding of your financial circumstances. Too many other debts may mean you don’t have enough leftover funds to meet loan repayments.
- Credit score: A poor credit score won’t necessarily mean you cannot get a mortgage, but the lender will consider your credit report. There are bad credit home loans that have higher interest rates.
- Assets: If you already own another property or other high-value assets, you prove to your lender that you can meet financial commitments and are a responsible borrower. Therefore, they’ll consider you a low-risk borrower and offer a higher borrowing capacity.
- Job-status: Part-time or self-employed loan applicants may struggle to prove their stable income, even if they are high earners. You may need a low doc loan to prove your financial situation.
- Lifestyle: Most banks will want to know if you’re an expat. Living overseas will mean different things for your regular income and risk level.
What Does It Mean for My Borrowing Power if I'm an Expat?
Depending on the country you’re living in and your foreign income, some lenders might not look so favourably on your loan application. As there are so many countries and foreign currencies worldwide, not all lenders will offer competitive loans to expats. Therefore, you might reduce your borrowing capacity if you earn a tier two currency.
As an expat, you may want to approach a mortgage broker to ensure you get the best home loan options for your situation.
10 Ways to Increase Your Borrowing Capacity
Your borrowing capacity is crucial; it affects how much money you can borrow and the property you can purchase. Remember that your borrowing power will vary from lender to lender. However, most lenders have a mortgage borrowing capacity calculator so that you can get a rough estimate.
Here are 10 ways to increase your borrowing power to buy a better home.
1. Know Your Credit Score
Most lenders will base part of their decision on your creditworthiness. This means they look at your credit history or credit file to check whether you are responsible with money. Your credit score shows all your previous debt repayments, including missed or late payments.
While the lending criteria don’t specify a magic credit score number to hit, most lenders will consider 680 as good. However, you may still be able to qualify for a loan if you have a credit score of 600.
If your credit score is low, consider how you might improve it. Even a few points could mean a lower interest rate and increased borrowing power. One way to improve your score is to lower your credit card limits – too many maxed-out credit limits impact your score.
However, don’t close unused credit cards as these improve your credit score.
2. Reduce Your Debts
Unsecured debts, such as credit cards and personal loans, are costly, result in unnecessary spending and reduce the amount of money you can put towards your home loan. You won’t have to pay interest on your credit cards if you repay your full credit limit within the interest-free period, which might help improve your finances and your credit score.
Additionally, consider whether you can lower your interest rate on other loans and credit cards. If you can reduce the amount you pay towards debts, you should free up money to increase your borrowing capacity.
3. Reduce Excess Credit Limits
If you have any unused credit cards, you might consider reducing the limit. Speak to your credit card provider or bank about lowering your limit. Some lenders consider any open credit cards as drawn to their full limits, assuming you have thousands of dollars of debt, even if you never use your card.
On the other hand, closing unused credit cards may negatively affect your credit score. One of the factors that make up your credit report is “credit utilisation rate”.
Essentially, if you have one card to its full credit card limit and another empty one, this looks bad. Whereas, if you have each drawn to 50%, it suggests you can balance your debts, which may increase your borrowing capacity.
4. Choose the Right Home Loan Product
The type of home loan you select can impact borrowing power. Certain features and product types may increase or decrease capacity:
- Variable rate loans often allow you to borrow more than fixed rates initially.
- Opting for a basic loan without additional features like an offset account may boost borrowing power.
- Principal and interest loans generally provide greater borrowing capacity than interest-only.
- Low doc loans can assist self-employed or contractors with proving income and expenses.
Even if you do all you can to increase your borrowing capacity, you may need to accept that you need to consider a lower home loan amount. Generally speaking, if you borrow less, the lender might offer a lower interest rate and better terms as you are less risky.
Of course, borrowing less money means you may not afford your dream property. If you have your heart set on a house above your budget and borrowing power, consider waiting a few months or years to increase genuine savings and credit scores for a better borrowing capacity.
Plus, consider whether you need additional features, such as an offset account or redraw facility. While these might help your home loan repayments, they may affect how much money you can borrow.
5. Save A Deposit
Most lenders will allow you to borrow up to 95% of the property value, however, some lenders now offer 97% loans. Keep in mind that the better your home loan deposit, the greater your borrowing capacity.
If you purchase an investment property, you can use the equity from an already existing home to pay for the deposit on most housing loans. Moreover, your rental income should help improve your borrowing power.
Additionally, if you have a larger deposit of 20% or more, you won’t need to pay Lenders Mortgage Insurance (LMI). LMI protects the lender if you cannot repay your mortgage. You have to pay a lump sum or capitalise it on your home loan, which can significantly increase your monthly repayment amounts and reduce your borrowing capacity.
6. Cut Unnecessary Expenses
As mentioned, the lender will look at your expenses. If you have a habit of spending nearly as much as you bring in, the lender won’t believe you have enough funds to repay the home loan.
Try to cut out unnecessary expenses to prove to your lender that you spend responsibly. For instance, if you have many subscriptions, such as a streaming service and gym membership, consider cutting the unnecessary ones. Regular expenses chip away at your borrowing power.
7. Split Bills
Instead of purchasing a property in your own name, consider buying jointly with your spouse or partner. With two streams of income, you will have a better borrowing power. Additionally, two incomes will showcase your ability to repay your other outstanding debts, and expenses, and cover your dependents’ needs.
However, beware if your spouse is a foreign buyer. If your spouse or partner is not an Australian citizen or permanent resident, they will have to pay a foreign buyer’s stamp duty. This surcharge is as much as 7 – 8% in most states. Even if you are an Australian citizen, your spouse’s foreign national status will incur the surcharge.
8. Take a Longer-Term Mortgage
While long home loans result in more interest paid over the loan’s lifetime, they mean you can borrow more money with lower monthly repayments. Consider whether you should raise the loan term to increase your borrowing capacity.
Make sure you understand how much additional interest you will pay. Although, you can refinance your mortgage later to reduce the interest rate and loan term when you have better borrowing power.
9. Organise Your Finances
Organising your financial records will go a long way toward improving your borrowing power. This includes completing your tax returns, keeping bank statements, and showing payslips. You must have tax returns, payslips, and other financial documents as an expat. Clear records will help support your foreign currency income.
10. Speak to a Mortgage Broker
Whether you’re an expat, a foreign national, or living in Australia, a mortgage broker offers your best chances of getting a good home loan. A mortgage broker will consider your credit history and loan application to recommend how to improve your borrowing power.
How to Calculate Your Borrowing Capacity
To get an estimate of your potential borrowing capacity, use our online Borrowing Power Calculator. Simply input your income, expenses, debts, and other financial details. This will provide a rough guide to the amount lenders may approve you for.
However, keep in mind your true borrowing capacity depends on your specific financial situation. Factors like your desired loan amount, ideal interest rate, credit score, debts, expenses, and risk level assessed by lenders all impact the actual borrowing power.
The most accurate way to determine your personalised borrowing capacity is to speak with an expert mortgage broker. Our experienced team takes the time to understand your unique goals, income sources, credit profile, and more. We use this information to maximise your potential borrowing amount while keeping costs low.
Whether you’re buying your first home or investing in property, contact us today for a free consultation. Let us provide tailored insights on your borrowing power as a specialist mortgage broker.
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Frequently Asked Questions
Lenders will look at your income, expenses, debts, assets, credit score, and other factors to analyse your ability to meet loan repayments. Based on this assessment of your financial situation and risk level, they will determine a maximum loan amount you can borrow. Typically, the lower the risk you pose, the higher your borrowing capacity will be.
Speak to a mortgage broker for help determining your specific borrowing power.
To increase your mortgage amount, consider improving your credit score, cutting other loan debts, and speaking to a mortgage broker. Your borrowing capacity determines how much the lender will lend you – the greater your borrowing power, the more money you can spend on your dream home or investment property.
Increase your borrowing power by reducing the number of additional features on your home loan, extending your loan term, and improving your credit score. Different lenders require different lending criteria. By shopping around or approaching a mortgage broker, you may find you improve your borrowing capacity.
Yes, a larger deposit often means that you can borrow more. You can improve the loan to value ratio and borrow greater loan amounts with more money. A bigger deposit will also lower interest rates and ensure better loan terms.
Your credit score, deposit sizes, debts, living expenses, income, lifestyle and other factors impact your borrowing capacity. You can improve your borrowing capacity by organising your finances and saving a bigger deposit.
Yes, most lenders will allow borrowers to apply for up to 95% of the property value. However, if your loan to value ratio is more than 80%, the lender might ask you to pay LMI. This is a hefty addition to your monthly repayments.