One of the most common questions I am asked as a mortgage broker is “how do I increase my borrowing capacity?”
Firstly, what is borrowing capacity?
It is the amount of money a lender is willing to lend you for the purposes of buying a property
Here are 5 simple ways to increase your borrowing capacity
Develop a good credit score
When was the last time you checked your credit score? If you are like most people then never! One of the first things I tell clients is check your credit score. I have had some clients do this and realise there is a default on their file that they have forgotten about. Other clients have defaults on their report as a result of fraud that they weren’t even aware off.
Your credit score is very important when it comes to borrowing. Try and avoid late payments or defaults. Limit credit enquiries. Lenders are able to see the last 2 years of your repayment history so make sure it is ok.
Prove you can save
Lenders want to see that you can save. Most lenders offer a maximum loan of 95% of the purchase price if you are buying an owner-occupied property. The remaining 5%, lenders want to see that you are able to save this. They want to see this in your bank account for at least 3 months. Otherwise, it will be difficult to borrow. Try and save as much as possible, if you are able to save 20% of the purchase price even better as you won’t have to pay lenders mortgage insurance LMI.
Limit your expenses
Lenders are very particular when it comes to everyday expenses. Before borrowers provided estimates of their everyday expenses. Now lenders want statements to confirm everyday expenses. They generally want 3 months of statements. So if you are UBER eating way too much, what I suggest is to stop it 3 months before you apply for a loan.
Increase your income
Obviously the higher the income the higher the borrowing capacity. An increase of $10,000 pa in income will increase your borrowing capacity by approximately $100,000. So if you are self-employed this means you need to declare more income to the tax man or if you working for someone ask them for a raise!
Reduce your personal debt
Personal loans, car loans and credit cards reduce your borrowing capacity significantly. If you have them pay them off before applying for a home loan as this will increase your borrowing capacity. If you have a credit card with no outstanding balance, remember that the lender uses the limit of your credit card for servicing not what you have outstanding. So reducing your credit card limit will also increase your borrowing capacity.