3 easy tips to increase your borrowing capacity
Having problems financing the purchase of your next investment property? Here are three easy tips to increase your borrowing capacity.
Recently Australian banks and other lenders have been forced to comply with regulations that encourage responsible lending.
While these regulations might inhibit the amount of money that an individual can borrow, the rules are vital to ensure the financial system remains robust and protects borrowers from overstretching their financial capacity.
The amount an individual can borrow is determined by an ‘ability to repay test’, otherwise known as a ‘serviceability test’.
The serviceability test allows lenders to prove that borrowers can repay their loans. However, different lenders interpret this in their own way and the size of a loan for an individual can vary greatly from lender to lender.
So the serviceability test isn’t necessarily a broad, ‘cookie-cutter’ system but rather a tool that is interpreted differently from lender to lender.
This is why someone might be approved a $300,000-loan at ‘Lender A’, while the same individual could be approved a $400,000-loan at ‘Lender B’. The lenders simply interpret the client’s ability to repay the loan in a different manner.
Therefore, it pays to shop around or visit a mortgage broker that has a wide variety of lenders and lending products available.
To maximise your borrowing capacity from any lender, there are three easy steps you can take.
- Close unnecessary credit cards and review credit card limits
As part of the serviceability test, lenders will assume that your credit cards will be drawn to their limits. For example, a credit card with a $10,000 limit will be deemed by lenders as a $10,000 debt in your name, even if you haven’t used the card. If you have a credit card with a $10,000 limit but you only ever use a portion of this, then you should reduce the limit to a more appropriate level.
Furthermore, you should consider closing unnecessary credit card accounts and, if possible, only keep one card open.
- Reduce personal debt
Personal loans will affect your serviceability rating because these generally require expensive monthly repayments, which means you will have less disposable income to repay the proposed home loan. You can combine your personal debts into your home loan, which can increase your serviceability rating, but this will mean you repay the personal debt over the life of the home loan and subsequently more interest repayments in the long term. If possible, it’s best to repay personal debt as soon as possible or avoid it all together if you know you will be purchasing an investment property in the near future.
- Maximise incomes from existing investment properties
If you own existing investment properties, even just one, you should seek to maximise rental prices to increase your disposable income, which will be taken into consideration by lenders and in the serviceability test. Your property may be undervalued or you could complete some low-cost improvements to the dwelling to demand more rent. Even allowing tenants to own pets is a quick and easy way to demand higher rental prices.