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How to Improve your borrowing capacity
Your borrowing capacity is simply how much you can afford to borrow.
Two of the calculations that lenders will use to determine your capacity are your income and your liabilities, therefore the more you can increase your income and reduce your liabilities, the better your capacity to borrow will become.
The following 7 strategies can be used to increase your buying power:
1. Reduce your credit card limits
The less credit available to you in terms of credit limits, the better for your serviceability.
A lender will typically assess your ability to repay using the credit limit on each of your cards… whether or not you owe a single dime on any of them.
This can significantly impact the financing you’re eligible for. As an example, let’s say you have a credit limit of $8,000 on one card and $4,000 on another. The lender will show that you have $12,000 in debt when doing their calculations. This can reduce your monthly disposable income by about $300 ($3600 per annum).
2. Consolidate unsecured debts into your mortgage
Although not typically the best option, wrapping up your unsecured debts such as car loans, personal loans or credit cards, can improve your borrowing capacity because the loans won’t show as financial commitments.
Keep in mind that these debts (rather than being paid more quickly as they would normally have been) will be stretched out over the term of the loan, increasing the interest that you’ll end up paying.
3. Keep financial records updated
Make sure your lender has the most up to date information on your income, preferably giving them a figure that represents your annual income, taking into account bonuses, overtime and raises, that you might receive throughout the year.
4. Choose the right loan
Different loan products can have different levels of borrowing capacity (even within the same lending institution) so it’s important to choose the one that’s right for your situation.
Features such as an interest-only loan, fixed or variable and/or a line of credit will have an effect on your capacity to borrow due to calculation differences.
Note: A mortgage broker can be tremendously helpful in choosing the right product because he is familiar with each lender’s practices and requirements.
5. Switch up your liabilities with your partner
This strategy can work if you are buying a property separate from your partner.
On paper, you can rearrange your expenses so that your partner is responsible for paying them.
For example, if you have two dependant children, expenses surrounding their care can be counted as your partner’s, which will “free up” more discretionary income for you on the lender’s balance sheet.
6. Choose a longer repayment option
Depending upon where you’re at in your wealth creation strategy, this strategy could be a good choice.
For example, if you’re young and in the beginning stages of property investing, chances are you’re short of capital, income or both, so the lower the monthly repayment (because of a longer loan term), the better your serviceability.
The lower repayment keeps more money in your pocket which you can use to make extra payments on your loan, pay off other properties, put towards your SMSF or add to your buffers, whichever strategy works for your particular situation.
7. Cross collateralise
While not a worthwhile option, you will improve your serviceability when you cross collateralise.
From the lender’s viewpoint, you’re less of a risk when they can secure more of your assets, therefore their loan repayment calculations will be different than if you used leverage on a single property.
Realise that in the event of a default on your part, the lender has recourse to obtain possession of all of the security you pledged when taking out the loan.
This strategy can also restrict your ability to refinance with another lender, so be aware of all of the pros and cons before committing to a cross collateralised loan.
Be advised that we don’t recommend this strategy and speak with your broker (or a broker from our partner, Positive Financial Services) before making a decision.
For more tax savvy tips and property building strategies, come along to our next Property Investor Night. If you’ve bought an investment property but are stuck as to how to increase your capacity to buy more properties, or if you’re simply exploring this great wealth creation tool, don’t wait – attend this FREE event and get the answers you need! You’re under no obligation to do anything more – all you’ll spend is a couple of hours learning about where the growth markets are at, the best strategies to use in those markets and much, much more.
For more tax savvy tips and property building strategies, come along to our next Property Investor Night.
If you’ve bought an investment property but are stuck as to how to increase your capacity to buy more properties, or if you’re simply exploring this great wealth creation tool, don’t wait – attend this FREE event and get the answers you need!
You’re under no obligation to do anything more – all you’ll spend is a couple of hours learning about where the growth markets are at, the best strategies to use in those markets and much, much more.