Borrowing power refers to the amount of money a bank can approve for a loan based on an individual's financial situation. Having a high borrowing power means that the banks trust the borrowers can repay a larger mortgage. Borrowing power is influenced by a range of factors, from savings, income, spending to any other debts you may have. However, there are some simple steps that can be taken to increase your borrowing power and therefore expand your property selection ranges.
Increase Your Income
If it’s been a while since your last pay rise, it may be worthwhile talking to the boss about a salary review. Whether your employer agrees or not, any opportunity to increase your income should not be missed. Of course you can use your side hustle to earn more income. Any little extra income may help you improve your borrowing power.
Reduce Your Debt and Credit Card
It is normal to have some debts, but there is a difference between positive and negative debt. Existing mortgages and university HELP loans are a reflection of the former, as they are not usually indicative of a poor financial situation. Conversely if you have a large number of credit cards, personal loans, this is considered bad by the bank. Even if you have never reached your credit card limit and always make your payments on time every month, lenders will still see those as current debt and therefore reduce your borrowing power.
Cut Your Expenses
After determining that you have a steady income and can manage your existing debts, banks will want to know about your daily expenses. Using your income and spending habits, the bank will assess whether you are able to meet your daily expenses while paying your loan on time. 3-6 months before applying for a home loan, it is wise to look carefully at where you can spend less and cut back on some unnecessary expenses. Cutting back on expenses will not only help you improve your borrowing power, but will also increase your savings. The more money you can save, the more your savings will be and the more it will show you have good financial skills.
Raise Credit Score
Everyone has a credit history that shows how well you have managed your bills and debts in the past. This credit score is checked by the bank when you apply for a home loan. Knowing your credit score will help determine if you are in a healthy financial position. Even if you have a poor credit score, don’t be afraid, it can be improved by paying your bills, loans and rent on time. Maybe it can just take a little time, but lenders will notice that you have built up a good repayment history.
Choose a Longer Loan Term
A longer loan term, means lower monthly loan repayment. In other words, it can increase your borrowing capacity. Some banks now can offer 35 years loan term, which potentially could offer better borrowing capacity. But please also be mindful that, longer loan term means you will end up paying more.
Avoid Lender's Mortgage Insurance
Lender's Mortgage Insurance applies if the loan amount is more than 80% LVR. But banks also will charge a higher than normal interest rate if the LVR is more than 80%, which will affect your borrowing power. First Home Guarantee policy (FHBG) enables eligible home buyer to purchase a home with as little as 5% deposit, with normal interest rate, and without paying LMI.
Contact Mortgage Broker
Each bank has its own criteria for calculating borrowing power, and borrowing power can vary from bank to bank. Your borrowing power is not a fixed figure. An experienced mortgage broker will know which banks are best for your financial situation. They will also guide you through the process of applying for a home loan so that you have the best chance of getting the money you need. Contact your professional mortgage brokers at MoreMore Finance to get more information.
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