As a homeowner, potential homeowner, or mortgage seeker, you have probably asked yourself, “how can I increase my borrowing capacity?” In the world of mortgages, home loans, mortgage brokers and financial advisors, your borrowing capacity is a pivotal factor that lenders consider when assessing your loan application.
It’s the total amount that a lender deems you’re able to borrow, based on a range of financial considerations. By increasing your borrowing power, you improve your prospects of securing a mortgage, as well as having a wider choice of property markets.
This article provides an in-depth look at how you can increase your borrowing capacity, ensuring a smoother homeownership journey.
Our focus is on providing professional, educational insights to help you grasp the intricacies of borrowing capacity.
Understanding Borrowing Capacity
Lenders assess these factors to gauge your ability to service your loan without falling into financial hardship.
How To Increase Borrowing Capacity
1. Boost Your Income
Boosting your income is the most direct method of increasing your borrowing capacity, but it often requires the most work. Here are some ways you can do this:
- Career Advancement: Regularly updating your skills and qualifications can make you a more valuable employee, increasing your chances of securing promotions and a pay rise.
- Job Change: If there’s limited scope for growth in your current job, consider switching to a job with a higher salary or better growth opportunities.
- Managing School Fees: Managing your income also includes the effective handling of regular outgoings like education fees/debts. Demonstrating your ability to meet these commitments without affecting your capacity to pay mortgage repayments can be seen positively by lenders.
- Rental Income: If you have an investment property that generates income from rent, this can be a valuable addition to your overall income, effectively increasing your borrowing capacity. Make sure that you are carrying out a rent review annually and speak to your property manager to make sure that your rent is on par with the market.
- Investments: Beyond rental properties, explore investment options like stocks and bonds. Remember, investments come with risk, so it’s crucial to research thoroughly and consider consulting with a financial advisor.
2. Minimise Your Liabilities
When lenders assess your loan application, they don’t just look at your income; they also consider your existing debts from personal loans. Here’s how you can minimise your liabilities:
- Unsecured Debts & Car Loans: If you hold any unsecured debts, such as credit card balances or your car loan, consider paying these off first, as these high-interest liabilities could significantly impact your lending capacity.
- Credit Limits: Be mindful of your credit card limits. Even if you don’t use your full limit, lenders regard this as potential debt which could impact your ability to meet loan repayments. Reducing your credit limit (or even better closing your credit card account) could significantly increase your borrowing capacity.
- Avoid New Debt: It’s important not to take on new debt in the lead-up to your home loan application. This could significantly reduce your borrowing capacity.
3. Maintain a Stellar Credit History
Your credit score is like a financial report card that lenders use to assess your reliability as a borrower. Here’s how you can maintain a good credit history:
- Timely Payments: Pay your bills, personal loans, and credit cards on time. Late or missed payments can negatively affect your credit score.
- Limit Credit Enquiries: Every time you apply for credit, it gets recorded on your credit report. Multiple enquiries within a short span can lower your score.
- Regularly Check Your Credit Report: This allows you to spot and rectify any errors, fraud, or identity theft. You’re entitled to a free report once a year from the major credit reporting bureaus.
4. Streamline Your Living Expenses
Lenders assess your living expenses to determine how much loan you can comfortably service. Streamlining your living expenses can significantly increase your borrowing capacity. Here’s how:
- Budgeting: Implement a strict budget and stick to it. Prioritize necessary expenses like bills, groceries, and healthcare, and minimize discretionary spending.
- Genuine Savings: Show lenders you have genuine savings by maintaining a consistent saving habit over a period. This not only assists in building your deposit but can also positively affect your capacity.
Remember, increasing your borrowing capacity isn’t about dramatic changes but a series of small, consistent actions that build towards a stronger financial foundation.
5. Opt for a Longer Loan Term
Opting for a longer loan term can decrease your monthly repayments, which could increase your borrowing power. Here’s what to consider:
- Interest Over Time: While a longer loan term means smaller monthly payments, you’ll end up paying more interest over the life of the loan.
- Future Financial Goals: A longer loan term means a longer period of debt. Consider how this aligns with your future financial goals.
6. Consider a Joint Loan
Applying for a joint home loan with a partner, family member, or friend can significantly increase your borrowing capacity, but it’s essential to consider:
- Shared Responsibility: Both parties are equally responsible for the loan. If one person defaults, the other is responsible for the payments.
- Legal Advice: Given the financial and legal implications of joint loans, it’s advisable to seek legal advice before proceeding.
7. Keep Your Financial Records in Check
Ensure your financial documents are updated, well organised, and easy to understand. Inconsistencies in your financial records may lead lenders to underestimate your income, thus reducing your capacity.
8. Deposit a Larger Down Payment
A larger down payment reduces the amount you need to borrow and shows lenders you’re capable of saving. Here’s how you can build a larger down payment:
- Regular Savings Plan: Implement a regular savings plan and stick to it. Even small regular contributions can add up over time.
- High-interest Savings Account: Consider putting your down payment in a high-interest savings account or term deposit to grow your savings.
9. Consider a Loan with Fewer Features
Home loans with numerous features such as an offset account, redraw facility, or loan portability, often come with higher fees.
Opt for a basic loan with fewer features to reduce the loan cost and increase your borrowing power.
10. Use a Guarantor
A guarantor can boost your capacity by providing extra security for the loan. However, it’s important to note:
- Risk to the Guarantor: If you default on your loan, the guarantor is responsible for paying it. This can be a significant financial risk for the guarantor.
- Legal Advice: Given the financial and legal implications, both parties should seek independent legal advice before proceeding.
11. Regularly Review Your Finances
Like every aspect of your life, your financial situation is dynamic and will inevitably change over time.
Regularly review your income, expenses, and debt commitments, as these are the primary determinants of your borrowing power. As you pay down debts or increase your income, your capacity to borrow will naturally grow.
12. Shop Around for the Right Lender
Not all lenders calculate borrowing capacity in the same way. Some lenders may allow for higher levels of existing debt or have more generous assessments of your income. Research various lenders and their lending criteria to ensure you’re getting the most from your borrowing power.
13. Maintain Steady Employment
Stable employment history is appealing to lenders as it suggests you have a consistent income stream to service your home loan. If you’re considering changing jobs, it may be wise to secure your home loan first.
14. Consider Your Dependents
The number of dependents you have affects your living expenses, and consequently, your borrowing power. While you can’t easily change the number of dependents you have, it’s worth noting that each additional dependent can reduce your borrowing power.
15. Maintain a Savings Buffer
A healthy savings account not only impresses lenders but also allows for more flexibility in your repayments, which can enhance your borrowing power. It indicates to the lenders that you’re capable of managing your money effectively.
Ultimately, increasing your borrowing power is about demonstrating your reliability as a borrower and your ability to service a home loan.
While these steps may take time and require substantial financial discipline, they will put you in a strong position to secure a higher amount when applying for a home loan.
Understanding and optimising your borrowing power is an empowering step towards successful homeownership.
It offers you the knowledge to plan, the power to negotiate, and the ability to make the most of your financial potential.
So, take charge of your financial future today, and open the door to the endless possibilities of tomorrow.
Understand the Impact of Interest Rates
The type of home loan you choose can affect your borrowing capacity. For example, a fixed rate loan can offer predictability in your loan repayments, making budgeting easier.
However, if the interest rate is high, it could reduce your borrowing power.
In the journey towards homeownership, understanding and strategically increasing your capacity can be the key that unlocks your dream home.
While it’s not an overnight process, consistent steps toward financial discipline and stability can significantly elevate your borrowing potential.
From maintaining a clean credit history, reducing non-essential expenses, and opting for a longer loan term, to considering a joint home loan or leveraging a guarantor, each strategy presents a viable pathway to expand your borrowing power.
It’s also crucial to remember that not all lenders are the same, and shopping around to find the right lender can also bolster your borrowing power.
Take charge of your finances today, and move closer to turning your homeownership dreams into reality. Keep these insights as a guide in your journey, but also remember to seek professional advice tailored to your unique financial situation.
Finding the Right Lender
A mortgage broker can guide you through the lending process and find a home loan that suits your financial circumstances. Some lenders may have different policies on school fees or offer more attractive interest rates, affecting your ability to meet home loan repayments.
Ultimately, increasing your borrowing capacity is about demonstrating your reliability as a borrower and your ability to manage loan repayments. Every small step you make towards improving your financial health can contribute to this goal. Find a mortgage broker today from Sydney or Melbourne.
Tori is a finance blogger and researcher at OurTop10.com.au, where she enjoys helping people navigate the world of finance and money. Through her insightful articles and comprehensive research, she empowers readers with valuable knowledge on budgeting, saving, investing, and retirement planning.
Tori’s approachable and empathetic style makes complex financial concepts relatable and easier to understand, She aims to foster a sense of community and leave a lasting, positive impact on her audience’s financial well-being.