Most borrowers calculate their borrowing power and then start searching for a property within budget. However, there’s a high chance your borrowing power could actually change during your property search – either bringing your property closer or pushing it further away.
Here are three tactics that could improve your borrowing power this year.
1. Cut credit cards
Credit cards are often considered a great way to manage cashflow, pay bills and of course earn those airline points (hello business class!). However, credit cards also play an influential role in determining your borrowing power. Even if you have a perfect repayment history, lenders often assume you’re using credit cards much more than you are.
While we won’t go into the weeds of exactly how this is calculated, what we will share is that a relatively innocent-seeming $15,000 credit card limit could be suppressing your borrowing power by almost $70,000! This figure naturally increases with higher credit limits or multiple credit cards under your name.
Moral of the story: if you want to maximise your borrowing capacity, then it’s crucial to consider your credit card usage.
2. Keep an eye on the RBA
You’ll see mortgage holders on the edge of their seat when the RBA meets to make their cash rate decision, as this will be directly impacting their hip pocket and disposable income. This is because a change in the cash rate will often impact the amount of interest charged by most Aussies holding a variable rate mortgage. And when that interest rate moves by a few percentage points (otherwise known as ‘basis points’), it can make a big difference in the monthly repayments of everyday homeowners.
The cash rate also plays a role in determining your borrowing capacity. This is because lenders calculate the repayments you could comfortably afford each month before working out the size of the loan they might offer you.
When interest rates are low, more of those repayments will go towards the loan principal, meaning you might qualify for a larger loan. However, when interest rates go up, a larger share of those monthly repayments will go towards paying the interest portion on a smaller loan, in-turn, decreasing your borrowing capacity.
3. Reduce everyday expenses
Getting home loan-ready can almost be like training for a marathon (or any big non-sporting event for those of us less athletically inclined). While you might think you’re ready after getting all your documents and finances in order, you’ll benefit in the long-run by getting truly ‘finance-fit’ before submitting your application. This is where small, consistent changes could impact your borrowing capacity.
When submitting your home loan application, lenders will look at your income to expense ratio to understand how much disposable income you have each month. If you’re able to cut some unnecessary spending in the months leading up to your loan application, you’ll be indicating to your potential lender that you can devote more of your income to servicing your loan. Plus, you’ll be saving more money which you could contribute towards your deposit. It’s a win-win! Any broker should be able to help you understand more about this process and provide some suggestions to help you get finance-fit, so don’t be afraid to ask them for ideas and advice.
Our expert’s take:
Just like any training program, long term success is tied to a consistent and sustainable approach. You could consider making sustainable cuts to your expenses (like cheaper utility providers, ditching unused subscriptions or cutting back on a daily coffee habit) to help boost your disposable income and savings. You’ll need to keep up these healthy financial habits after you take on a loan to ensure you can make your repayments into the future.
Creating a solid savings position by reducing your expenses could help you make repayments when unforeseen circumstances might prevent you from relying on a regular source of income for a period of time. It could even help cover the impact of any changes in cash rate made by the RBA.
The information provided in this article is general in nature and is not intended to be financial advice. We always recommend you seek your own, independent financial advice which can take into consideration your specific circumstances.
