The first step to buying your first home is knowing how much you can borrow. Knowing just how much you can borrow will help you know just how much you can borrow and the options available to you. Though capacity differs from lender to lender, here are 10 ways to make sure your borrowing capacity is optimal:
Know your credit score: An individuals credit score is often indicative of their financial health and is a key metric in a lenders assessment. Being aware of this and most importantly how to improve your score will be of great benefit.
Lower your credit cards: You might want to consider getting rid of them and lowering the limit on any cards you keep, as lenders consider credit cards to be drawn to their full limit. As an example, if you have two credit cards, one with a $2,000 limit and the other with $5,000, a lender will write down $7,000 in debt against you.
Reduce debts: Unsecured debts like credit cards and personal loans can be very expensive and affect the amount you can borrow on a mortgage. If you work to reduce your high-interest-rate debts you can increase your borrowing capacity.
When considering a loan, take into account the features of the loan product so you know if it suits your situation. Loan features may impact how much your lender will offer you, and this includes things like packaged products, offset accounts etc.
Pay your bills on time: Potential lenders may look unfavourably on applicants with a history of overdue accounts, so avoid defaults getting onto your credit report. To do this, you need to ensure you pay your bills before they become overdue.
Work on your genuine savings (your deposit). Having genuine savings for your deposit will significantly increase your borrowing capacity. We recommend 10%, 5% for your deposit and 5% for costs relating to your purchase. ie. stamp duty, solicitor fees etc.
Increase your income: Increasing your income is a great way to increase your borrowing capacity. Save your tax return, rent your spare room, or do some extra shifts. Consider, too, your ability to get promoted in your work place and negotiate for a pay rise.
Longer Mortgage Term: A 25 or 30 year mortgage is generally the norm, but a longer term can reduce your repayments. For example, $400,000 borrowed over 25 years at a 1.99% p.a. advertised interest rate equates to a $1,693 per month mortgage repayment. Compare this to a 30-year term, which reduces this to $1,476. The trade-off is that the latter results in more than $23,000 extra in interest paid over the life of the loan.
Any existing assets you have, such as a share portfolio, investment properties, car/boat/motorbike, or other tangible assets may improve your ability to borrow. This is because they can also demonstrate your ability save and invest money over time.
Maintain a secure job: You don’t need to be working full time or part time but you will need to ensure you have a secure job. The longer you have worked there the better!