Borrowing capacity simply means the amount a lender will lend you to buy a property. It usually depends on your income, family size, location, outstanding debt, type of loan, and the lender you choose.
It is important to know your borrowing capacity because it gives you a fair idea about what kind of properties you can buy.
Investors and homebuyers waste a lot of time searching for properties that are outside their budget. It happens because they are not aware of how much they can borrow. If you have a reasonable understanding of your borrowing capacity you can evaluate your monthly loan repayments, you can also take into account interest rates and fees.
Things you can do to increase your borrowing capacity
If you have unused credit cards, it is best to cancel them.
When your lender calculates your borrowing power, they take cognizance of your credit cards, ignoring the fact that they are being used or not. It is prudent to reduce the limit on your credit card because that improves the amount you can borrow.
Also, your credit score indicates your financial health. Our experts recommend that you dedicate a few months towards making regular bill repayments.
Consolidate your debt
By consolidating any debt you show that you have fewer financial commitments. If you have unsecured debt that means you will have to pay higher interest rates which will affect your borrowing capacity.
Choosing the right loan can have a large impact on your borrowing capacity
Our experts recommend that you assess and analyze different home loans because product features such as interest-only repayments, fixed rates, variable rate discounts, and line of credit have the power to affect your borrowing capacity. Your loan product should match your needs and circumstances, especially your financial circumstances.
The best way is to use an experienced broker that can deal with your situation holistically and give you the best solution.
Get your finances in order
When it comes to borrowing capacity, banks assess your most recent tax returns. If you are self-employed, outdated financial evidence can be bad for your borrowing capacity. This Is why it is so important to have a good accountant on your side who understands your needs and goals and makes sure you are up to date. Our property financial advisor recommends that you should look carefully at your spending and bank statements to know where you could be saving. This practice facilitates you to plan for your future smartly.
Apply for a longer loan term
Applying for a long-term on your loan is seen as less risky, and if it suits your financial situation to go with a longer loan term, you should consider it. If your income improves in the future, you have the option to refinance it to convert it into a shorter loan term.
Save up for a larger deposit
If you are seen as a low-risk borrower, it shows your character as a borrower besides the obvious benefit of paying lower LVR (Loan To Value Ratio). You may also avoid paying LMI (Lenders Mortgage Insurance) if your deposit exceeds the 20% mark.
Buying an investment property increases your borrowing capacity
If you apply for a loan for investment purposes, lenders take into account the income you will generate from rent along with your regular income, and this in turn will increase your borrowing capacity.
This is why working with a property strategyst is crucial to get the right property.
It is very common for investors and homebuyers to face many obstacles when they are trying to expand their portfolios. It is crucial that they understand how the banks view them as an applicant, and what they can do to increase their borrowing capacity.
