Boost your borrowing power: Follow these steps to pave your path to a bigger home loan.
Your home loan borrowing power, or the amount lenders are willing to lend you, significantly depends on your current financial circumstances. It plays a pivotal role in dictating the home you can afford, and the good news is that you can improve it.
Understanding your borrowing capacity is a crucial initial step when applying for a home loan. If it falls short of your expectations, you can take steps to improve it.
1. Increase Your Income
While this may seem obvious, your income forms the basis of your borrowing power calculations. Strive to increase your income, whether through negotiating a raise, switching to a higher-paying job (you'll need a stable employment history), or exploring additional income streams, like a side gig. Do remember that lenders usually consider income from secondary jobs only if they've been stable for a year or more.
2. Minimise Expenses
Lenders factor in your monthly expenses while determining your borrowing power. Reducing your outgoings can directly enhance your borrowing capacity. Explore ways to lower recurring expenses such as insurance, mobile phone bills, and utilities. Reevaluate subscriptions you rarely use and cut back where possible. If you already have a mortgage, consider refinancing for a better deal to reduce monthly payments.
3. Clear Outstanding Debts
Other outstanding debts, such as car loans, personal loans, and credit card balances, reduce your borrowing power. Clear these debts before applying for a home loan if possible. Alternatively, you could consolidate other loans into your home loan.
4. Reduce Credit Limits
Credit cards can limit your borrowing power regardless of the outstanding balance. Lenders consider your credit limits as potential debt, so consider closing unused credit cards and lowering the limits on the ones you use.
5. Boost Your Savings
Lenders view substantial savings as evidence of financial responsibility. A larger deposit also lowers the loan-to-value ratio, making you less risky to lenders. Establish a regular savings plan, dedicate a specific account solely to savings, and auto-debit a predetermined amount each month.
6. Understand and Improve Your Credit Score
A higher credit score increases your borrowing power. It is influenced by factors such as credit application frequency, repayment history, defaults, and adverse financial rulings. It's crucial to know your credit score, ensure its accuracy, and work towards improving it by making timely bill payments and limiting unnecessary credit applications.
7. Opt for Longer Loan Terms
Longer loan terms result in lower monthly repayments, potentially increasing your borrowing power. However, this could lead to higher total loan costs due to compound interest, so weigh this option carefully.
8. Engage a Mortgage Broker
Different banks have varying criteria for borrowing power calculations. A competent mortgage broker such as Fync can guide you to lenders who may view your financial situation favourably and assist you through the loan application process.
9. Choose the Appropriate Home Loan
Numerous lenders offer a variety of home loan products, each with different methods to calculate borrowing capacity. Compare the market to find the right lender and home loan that suit your circumstances, potentially enhancing your borrowing power.
10. Consider Loans with Lower Deposits
While a 20% deposit is often deemed ideal, many borrowers proceed with less. The required funds for a home purchase include several upfront and hidden costs, including Lender's Mortgage Insurance (LMI) for deposits less than 20%. LMI can significantly increase loan amounts without benefiting the borrower. However, sometimes paying LMI upfront could be more cost-effective than waiting and risking property market price increases. Consult a broker to understand how LVR and LMI will affect your circumstances.
With these strategies to increase your borrowing capacity, you're now better equipped to take your next steps in the home loan journey. But remember, you don't have to navigate this complex process alone. At Fync, we have a range of tools and services designed to help you understand and enhance your borrowing power, from income calculators to debt reduction strategies. If you're looking for personalized advice or want to dive deeper into what factors can influence your borrowing capacity, our experienced professionals are ready to assist. Visit the Fync website today to explore our resources and services, and let us help you maximize your potential in your quest for homeownership.
*Disclaimer: Please note that the information provided in this communication is for general informational purposes only and should not be construed as professional advice. It is not intended to substitute for personalised financial, legal, or tax advice. Please consult a qualified professional before making any decisions based on the information provided.