Boosting your borrowing capacity by tens of thousands of dollars
The most important factor to consider before buying property is how much you can afford to borrow.
Here are seven simple steps that could increase your borrowing capacity by tens of thousands of dollars.
Keep your private information private
Shop around for the best mortgage rate or product, but be cautious in how much personal information you share. Providing your name and address will allow a lender to make an enquiry on your personal credit file.
Every time you apply for a credit card, personal loan, or interest-free finance for furniture at a retail store, a credit hit appears on your credit record, so it is wise to avoid adding to add these enquiries when looking for the best mortgage. The more credit hits you have the more of an unwanted commodity you become to a lender.
Use a mortgage broker
A mortgage broker can shop around for you and help you avoid incurring multiple credit inquiries.
Lenders differ in how they handle various income streams and existing debt, so a broker can access borrowing calculator and tools to find a suitable product.
Don't forget about qualifying rates
Lenders use qualifying rates for debt they provide you so, if rates go up, they have ascertained you can still afford the loan. It is a buffer, even if your interest rate is 3.5-3.9%.
There are a small number of lenders that apply little to no buffer on debt you have elsewhere, only applying it to the debt that they are exposed to. This means your borrowing capacity can increase dramatically.
For example, if you apply for a $600,000 loan, lender B can either apply a qualifying rate of up to 8% (typically around 7.25%), negatively impacting on how much you can borrow next.
Never go guarantor
Never allow yourself to be used as a guarantor for family or friends on their loan.
Most lenders will consider you to be jointly and individually liable for the entire debt, and yet you have put yourself at risk for no financial benefit.
Consider whether the emotional benefit of bailing out a loved one is worth holding back your property dream.
Cut down on credit
Reduce the number of credit cards you have and the limits on the cards.
Every $1000 you lower your credit card limit by increases your borrowing capacity by up to $5500 depending on the lender.
Living expenses can play havoc with your borrowing capacity.
Most lenders have increased the amount of living expenses attributable to each person on the loan and in the same household.
Lenders are also asking borrowers to itemise their expenses. The more you spend, the less you will be able to borrow.
In the past, it was easier for borrowers to understate their living expenses and get away with it. Lenders are now clamping down on this, insisting that basic expenses (including food, transport and utilities) be separated from discretionary spending and additional living expenses (such as restaurants, holidays, childcare and private school fees). The more discretionary expenses you have, the less you can borrow.
Keep a paper trail
Keep your paperwork up to date, especially if you are self-employed.
It can make a big difference in your rate and borrowing power when tax returns and assessment notices can be supplied to the lender.
Self-employed borrowers do sometimes prefer to avoid tax, rather than to increase their taxable income on paper.
If the taxable income was able to be increased on paper, it could aid in increasing your borrowing capacity. Pay any tax debt you have, otherwise the interest rate you pay could vary by as much as 2%+