How Can I Improve My Borrowing Power
Understanding what will impact your borrowing capacity could mean the difference between buying your dream home or settling for less. Increasing your borrowing power is relatively straight forward.
There are two main ways to increase your borrowing power. The first one is to increase your income and the other one is to reduce your
expenses or monthly commitments.
Increasing Your Income
Here are three things that you could do to increase your income:
1. Ask for a Pay Rise
You could boost your borrowing power by asking for a pay rise from your boss. While asking for a pay rise can be daunting, if you don’t ask, the answer is always no. If you don’t think you are getting paid enough, it could be worth a try.
Changing jobs to get a pay rise can have advantages and disadvantages in terms of a home loan. Employment stability is very important to lenders when assessing your loan application so a new job, especially if it’s casual, might not impress them, but if you’ve moved from casual to full-time or regular part-time work lenders will look at this favourably. You may need to wait a little longer for your loan as very few lenders in the market place are willing to lend to someone who is still under probation in a new job.
2. Take A Second Job
The extra income from a second job will boost you borrowing capacity, however, there are a lot of restrictions surrounding it. Generally, you need to be in your second job for at least 12 months and your total working hours (your main job and second job) may not exceed 60 hours. Most lenders will only include 50% of your second income in the servicing calculation.
3. Buying with a Partner
If you are not married, buying your first home with your partner and combining both of your incomes may increase your borrowing power. However, this is a big commitment not just financially but also emotionally and the stress can take a toll on your relationship.
We used the words “may increase your borrowing power” because lenders will include your partner’s expenses, commitments and liabilities when
determining your combined borrowing power. If your partner has a lot of debts, this may actually reduce your borrowing capacity.
Reducing Your Expenses
There are a lot more things that you can do to reduce your financial commitments and improve your borrowing power. For example:
Cut back on the number of Credit Cards you have
There is nothing wrong with credit cards… as long as you pay them off at the end of each month. If you can’t afford to do that, honestly, you shouldn’t have a credit card.
In relation to a home loan application, lenders will take into consideration the credit card limits and not the balance. So, if you are not using your credit cards, get rid of them or consider how much you really need and reduce your credit card limit to the bare minimum.
Get rid of Store Cards
A store card, for example a Myer card, works exactly like a credit card except that its main purpose is to generate additional profit for the store. Again, like a credit card, lenders will take into consideration your store card limits and not your balance. Get rid of your store cards as soon as possible and pay cash for your future purchases!
Pay off Personal Loans
Personal loans attract very high interest rates and can significantly impact your borrowing capacity. Having several personal loans may indicate to the lender that you can’t save and are living beyond your means. Make a priority of paying loans off as soon as you can.
Pay off your Car Loan
Like personal loans, car loans attract high interest and can significantly impact on your borrowing capacity. Pay them off and you will see your borrowing power soar instantly!
Decrease Discretionary expenses
Think about your non-essential expenses like take away food, dining out, hobbies, pay TV and entertainment. Cutting back on these, even by just 50%, can increase your borrowing power significantly.
We’re here to help you
Dealing with banks can be a stressful experience but rest assured that our mortgage broker based in Glenelg (but our mortgage broker services the entire Adelaide Metropolitan area) can help you make the right decision about your mortgage. We will guide you at every stage of your loan process.
Contact us on 08 8376 0455 or drop into our office at 593 Anzac Highway, Glenelg SA 5045.
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.