Beginning the journey of buying a home in Australia can be incredibly exciting; it’s the start of a new chapter and an opportunity to create something special. But before that dream home becomes a reality, there are a few critical steps to take first.
For example, before you even begin looking, it’s helpful to know how much you can borrow from the bank so that you know what kind of property you can actually afford.
Your borrowing power depends on various factors such as your income, existing debts, credit score and assets available as security on the loan. Lenders generally calculate how much they are willing to lend by taking into account all these factors along with potential risks associated with your application.
You should know that lenders want to minimise their risk, so having a good credit score, low debts, and a steady income all help when trying to get approval for a mortgage at competitive rates.
If your borrowing power is lower than expected, there are several steps you can take to increase it.
So, let’s break down seven easy ways how to increase borrowing capacity for a residential or investment property.
1. Save More for a Bigger Home Loan Deposit
One of the most straightforward ways to increase your borrowing capacity is by putting more money towards the deposit. The more money you have been able to save for the upfront payment, the bigger the home loan your lender may approve because lenders want to see a history of consistent saving, which demonstrates your ability to make regular home loan repayments, as a minimum deposit is generally required for the amount your want to borrow.
Having a larger deposit may also help you qualify for better mortgage rates as well, but this depends on the lender.
2. Shop Around for a Lender
Different lenders have their own lending policies, so it’s a good idea to shop around and compare multiple lenders to find one willing to lend you more money. Keep in mind that a lender willing to lend you more money may also charge a higher interest rate.
Here’s where working with a mortgage broker can be a valuable resource.
3. Organise Your Finances and Check For a Good Credit History
It goes without saying that lenders will also take a close look at your financial records and credit history before approving you for a loan. It pays off to organise your finances in one place and review it carefully before applying, including doing a credit check and ensuring that all of the information on it is accurate and up-to-date before applying for a loan.
Checking your credit rating lets you know how much money lenders may be willing to lend you.
If your credit score is not up to scratch and you’ve exceeded your credit limits, then you know what to work on before applying for the home loan, as some lenders requires a minimum credit rating.
For example, you might find it helpful to consolidate your debt into one loan so that you have one payment that you have to make. Or you might want to consider making extra payments towards your higher interest rate loans or credit cards so that you can pay it off quicker.
4. Reduce Your Personal Loans and Other Existing Debt
Another way to boost your borrowing capacity is by reducing your debt.
Lenders look at your debt-to-income ratio when assessing your loan application, so you need to ensure that you are:
- reducing your credit card limits, car loans and unsecured debts – especially those with high interest rates, and
- avoiding taking on too much debt if you want to improve your credit score and increase your borrowing capacity.
For example, don’t take out another car loan if you aren’t in need of a new car right now. Focus on reducing your credit limit, increasing your borrowing power and then considering a new car once you’ve secured a mortgage.
5. Cut Back On Unnecessary Expenses
Suppose you’re working on reducing your debt to increase your borrowing power. In that case, you will also need to focus on freeing up some extra cash flow, which will mean cutting back on non-essential expenses, such as dining out or subscription services.
And if you spend enough time planning and shopping around, you could even find ways to save money on living expenses and groceries.
For example, one of the simplest ways to save money on bills and groceries is by comparison shopping – which you can do by looking at prices from different retailers or suppliers and choosing the one that offers the best deal.
You could compare electricity prices from different energy companies to find the one with the lowest rates, or you could compare the prices of different brands of the same product to find the most affordable option.
6. Consider a Co-Lender to Increase Borrowing Power
If you have a spouse or partner, you may be able to increase your borrowing capacity by adding them as a co-borrower on the home loan – which can be particularly helpful if your partner has a higher income or a better credit score than you.
7. Speak to a Mortgage Broker
When it comes to the complex world of mortgage applications, it pays to speak with an experienced loan expert who can guide you through the process and ensure your application has the best chance of success.
For example, mortgage brokers can help you understand the different factors that affect your borrowing and repayment capacity, such as your income, expenses, credit score, and the lender’s lending policies. They can also help you identify any areas where you can improve your borrowing capacity, such as increasing your income or reducing your expenses.
In addition to providing guidance on how to increase borrowing capacity, a mortgage broker can help you find a lender who will accept higher borrowing capacity. They have relationships with a wide range of lenders and can help you compare different loan options to find one that meets your needs. They can also help you negotiate better terms, such as a lower interest rate or lower fees.
Beyond these benefits, a mortgage broker can provide you with valuable advice and guidance throughout the mortgage process. They can help you understand the different types of mortgage products available and advise you on which is best suited to your needs.
Increasing your borrowing capacity doesn’t have to be complicated. There are some simple steps that anyone can take to boost their chances of getting approved by lenders and securing their dream home!
Start by improving your credit score, increasing your genuine savings, putting down a bigger deposit, and minimising any debt; these three steps alone are enough to give most potential borrowers an edge when applying for a loan.
But if you’re looking for some guidance, don’t hesitate to get in touch with the team at The Mortgage Agency. We have an experienced team of mortgage brokers and advisors who are highly skilled in helping people find the perfect loan options to suit their individual needs.
Our team will work with you to evaluate your current financial situation, analyse what type of home loan best fits your budget and goals, compare different lenders, and discuss potential strategies to help the process go as smoothly as possible.
Contact us today to find out more.