8 Ways to Increase Your Borrowing Power
Between rising real estate prices and interest rates, everyone’s borrowing power represents less purchasing power than it was a couple of years ago. Borrowing power is the calculation lenders do to make sure that you can afford to make the repayments on the loan you are applying for.
So, it’s natural now that our borrowing power has taken a hit, that we may need to look to make some decisions that will help us increase our borrowing power to get our next loan. Here are some steps we can take to increase our borrowing power.
Decrease Credit Card Limits. Let’s pretend you have a credit card with a $20,000 limit but it’s carrying $1,000 of balance. Lenders will count that card as a $20,000 debt regardless of the balance. A $20,000 credit card limit equates to a monthly repayment of $760 in the lender’s eyes. So bring your credit card limits down as tight as you can.
Pay Off Your HECS Or Help Debt. Help is indexed to inflation – which means it was adjusted up by 7% in 2022-23 – so it makes sense to get it paid off in the current economic climate rather than treating them as they were – ‘free money’.
If you are earning $100,000 p.a. lenders will factor in a repayment of $500 per month (6% repayment rate as of 2023-24). Paying the debt off means you are freeing up this amount to increase your home loan borrowing power.
Pay Off/Consolidate/Refinance Car Loans, Personal Loans and Credit Cards. The less debt you are carrying the more borrowing power you have. Ideally, you should be looking to pay this debt off ASAP. If you can’t then look at refinance it to a longer term which reduces your repayment (but you do pay more interest this way) but it can get you the loan you want in the short term.
Cut your monthly expenses: Go through all the bills that hit your credit card or direct debit once a month… shop those around for a better rate – insurance premiums, phone/internet, power/gas. Double check for unused gym memberships, TV subscriptions etc. and cancel those.
Novated leases are costly. Instead of getting that fancy new car using a novated lease, it might make sense to buy a quality second-hand car instead. When you have a novated lease, most lenders just see ‘lower salary’ and they factor in a full set of car expenses into your monthly expenses anyway. They ignore the fact that the running costs of the car are already covered by the pre-tax and post-tax novated lease deductions and effectively double-count transport expenses. So from a borrowing perspective, buying a second-hand car and paying cash for it gives you more borrowing power.
Close any ‘buy now pay later’ facilities: Many of these show up on your credit report which in turn reduces your borrowing power. Do yourself a favor and just close them all and only pay cash instead, especially while you are trying to get your loan approved.
Refinance Your Mortgage: There are two ways to increase your borrowing power here. The first is to find a lower rate. The second is to refinance to a longer loan term e.g. back out to 30 years. You can often do both. This lowers your monthly repayment which in turn frees up borrowing power.
Move back in with Mum and Dad: It will cut your expenses and increase your borrowing power. However, there could be fallout well and truly beyond the financial so caveat emptor (buyer beware).
If you have any questions about how you can qualify for your next home call 1300 661 211 or go to https://www.mortgageworldaustralia.com.au/contact-us/ and book yourself a mortgage strategy session. We’ll look at what you need to do to qualify for your next loan.
