How to increase your borrowing capacity
While you should never borrow more on a home loan than you can comfortably repay, there are some sensible steps you can take to increase your borrowing capacity.
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What happens if you've found the perfect property, looked at the price, checked your borrowing capacity and realised you're coming up short? Don't despair. You might be able to increase your borrowing capacity to get you over the line.
While you should never stretch your budget beyond what you can realistically afford, there are a few ways to strengthen your position and make it easier to borrow a little more.
Save a bigger deposit
It seems obvious but we can't say it enough: saving a bigger deposit makes it easier to boost your borrowing capacity.
Get a clear idea of your property price range and then work out what a 20% deposit looks like. If possible, saving this much will make it easier to borrow the rest.
Here's the difference between a 10% deposit and a 20% deposit and the loan amounts you'll need with a $600,000 property.
|Property price||10% deposit||20% deposit|
That's quite a difference. Let's try the same thing with a $700,000 property.
|Property price||10% deposit||20% deposit|
Having a larger deposit means a lender will look more favourably on your application and increases the chances of getting the loan approved.
Now of course, simply saving a bigger deposit is easier said than done and certainly not realistic for every borrower.
But there are many other ways to boost your borrowing power.
Spend less, save more
While you might not be able to magically increase your salary, spending is something you do have more control over.
And again, it's a basic but vital fact: every dollar you avoid spending is a dollar you save.
Look at your bank accounts and work out how much you spend every month. Focus on the most recent months because that's what your lender will do.
When determining your borrowing capacity, lenders look at spending across a variety of categories including utilities, groceries, transportation, health, entertainment and eating out.
Draw up a budget with these categories and try to identify four things:
- Regular expenses you can cut back on
- Regular expenses you can cut out completely
- Regular expenses you can't avoid
- One-off expenses that won't arise every month
Your goal is to find out ways to cut back on things you spend too much on or things you don't need to buy at all.
Be realistic, be ruthless.
And with one-off expenses it's a good idea to keep a receipt and be able to prove to a lender that these items are one-off only. Buying a $500 heater is a big cost but if you can demonstrate where the money went it looks much better than spending $300 every month on junk food. You're not likely to buy a new heater every month.
Make sure you cut back on spending in the months leading up to your home loan application. Your lender will look at up to six months' of your spending. So living like a hermit on a diet of bread and water for just one month won't be enough.
You're better off trimming your spend realistically and sticking to a budget for a few months before applying.
Here's a quick example of a monthly budget before and after a ruthless cost-cutting exercise and switching to cheaper products (using costs and products from Finder's database).
|Expense category||Current cost||Cheaper option||Savings|
|Home & contents insurance||Current monthly premium: $195||New monthly premium: $89||$106|
|Car insurance||Current monthly cost: $109.64|
|New monthly cost: $32.36|
|Phone||New smartphone contract plan: $95.74||Cheapest prepaid SIM only plan: $28.40|
(keep your old phone)
|Energy||Most expensive plan: $413 per quarter||Cheapest plan: $294 per quarter||$39|
|Broadband||Unlimited high-speed NBN plan: $69.99 per month||Unlimited lower speed NBN plan: $49.90 per month||$20.09|
|Digital subscriptions||Netflix (standard): $13.99|
Spotify (premium): $11.99
|Netflix (basic): $9.99|
Cancel Disney+: $0
Spotify (free): $0
|Food & groceries||Eating out: $200|
Food delivery: $200
|Eating at home: $200||$200|
|Alcohol||Monthly alcohol spending: $300||Drinking less: $150||$150|
|Total monthly savings||$684.69|
Cutting back and switching to cheaper products could save you hundreds of dollars a month and help increase your borrowing capacity.
Repay those debts
The more outstanding debt you have the less you can borrow for a home loan. It sounds obvious but again it needs to be said: shrink your debts, boost your borrowing power.
Simple. Well, not quite. Not all debts are equally urgent.
Focus on paying off high interest, urgent debt such as credit card or personal loan debts. Consider switching to a balance transfer credit card or a debt consolidation loan if it makes more sense for you.
HECS/HELP debt from tertiary education is much less urgent because you're not charged interest. It might diminish your borrowing power slightly, but you're likely better off focusing on any urgent debts, or using extra cash for your deposit rather than immediately dealing with this debt.
Make sure you have all the paperwork you need
The more accurate information you can provide your lender the better your chances of increasing your borrowing capacity.
Every lender's application system is different. But generally you will need:
- Documents to verify your identity.
- Up to six months of bank statements detail your saving and spending.
- A letter from your employer verifying your employment. Not every lender asks for this. Regular PAYG income in your bank account is often enough.
- A history of genuine savings. This means you can't just "borrow" $50,000 from your parents to pad out your account to make your balance look better. Money needs to be sitting in your account for 3-6 months prior to your application to count as genuine savings.
- Information about your assets. If you have other assets such as shares or investments then make sure you can verify them. This will potentially boost your borrowing capacity too.
Check your borrowing capacity with multiple lenders
Every lender calculates your borrowing power according to their own formula. You'll never get the exact same figure with each lender. So look at multiple lenders and try to use their borrowing power calculators. Keep in mind that these are always estimates only.
To give you a sense of how your borrowing power differs with each lender here are four examples taken from actual lender websites. For each example all expense details are identical:
- Number of borrowers: 2
- Number of dependents: 0
- Purchase: Home (not investment)
- Combined income (pre-tax): $140,0000
- Total credit card limit: $1,000
- Expenses (monthly): $4,300
And here are the results:
- Bank 1: You can borrow up to $857,000
- Bank 2: You can borrow up to $716,000
- Bank 3: You can borrow up to $642,200
- Bank 4: You can borrow up to $830,000
Even based on this random sample (we looked at two Big Four banks and two smaller lenders) the difference in borrowing capacity is as much as $214,800. That's huge.
Compare widely but apply once
Don't apply with multiple lenders! Just do some research and estimate your borrowing power. You can even try and get mortgage pre-approval from lenders (this gives you a rough but useful estimate of how much a lender will give you).
But you should only aim to submit one application for the lender you actually wish to go with. Multiple credit applications and rejections look bad on your credit score and can lead to failed applications or a diminished borrowing capacity.
Talk to a broker
If you're serious about borrowing more than your current capacity then talk to a mortgage broker.
One of the key benefits of a broker is that they can help you organise your application and help you find lenders that will accept your application. Your broker will have a pretty good sense of your realistic borrowing capacity (once you go through your finances with them) and can match you to a suitable lender.
You can do this on your own, of course. But a broker can often make it easier and give you a slight edge when you're trying to borrow a little bit more.
Ultimately you should know your financial situation better than anyone. This means regardless of what a lender says your borrowing capacity is you need to know what you can and can't afford to repay.
Borrowing more than you can afford is a pretty disastrous decision. Look at your income and expenses, property prices for places you're interested in, and set a realistic borrowing limit.
And be sure to factor in rate rises. Interest rates do rise, and when they do your repayments will go up. Here's a quick example if you borrow $500,000 and your rate jumps from 2.80% to 3.80%.
- Loan amount: $500,000
- Loan term: 30 years
- Rate: 2.80%
- Monthly repayment: $2,054
- Loan amount: $500,000
- Loan term: 30 years
- Rate: 3.80%
- Monthly repayment: $2,329
That rate rise will cost you an extra $275 a month, or $3,300 a year.
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