Part 2: How To Boost Your Borrowing Power In A Rising Market

Purchasing a new property is a very exciting time for investors and home buyers alike. You’re ready to hone in on the perfect piece of real estate and are itching to steamroll things forward, right? Unfortunately, there are a few market factors that could currently be impacting your borrowing power and raining on your property parade. 

As discussed in Part 1: How to boost your borrowing power in a rising market, the pandemic has significantly shaken people’s ability to secure finance right now. 

From the building industry to inflation and a full year of rising interest rates, borrowing power across the board has declined by a staggering 20%. 

SHOULD YOU BUY IN A HIGH INTEREST RATE MARKET?

If you can obtain lending to continue to build wealth through real estate, then you absolutely should charge on forward. 

The best time to buy property was yesterday. The next best time is today. Wealth in real estate is created over the long term, so in 20 years from now it won’t matter the market you bought in, only that you bought a prime piece of real estate and managed to hold it throughout the market cycles. 

But even the most experienced investors are not immune to these extreme market activities. Although they know that this is just part of the normal ups and downs that come with investing, they are ready and willing to tweak the plan when the market takes a turn. 

For you to appropriately do the same, you need to first assess your own financial situation to understand how you present to the bank from a lending perspective. Getting your ducks in a row before you approach the bank, will ensure you’re putting your best foot forward, and have the highest chance of securing a loan. 

FACTORS THAT WILL IMPACT YOUR BORROWING POWER

Your borrowing power is essentially how much the bank is willing to lend you. Knowing your borrowing power before you begin your property search means you won’t waste time looking at houses that are out of your price range. 

The amount a bank will lend you is affected by various factors, largely:

• How much you earn
• Your assets (including savings)
• Your credit score
• Any debt you have (car, home or personal loans, credit card debt)
• Your lifestyle and daily living expenses
• Travel expenses
• Financial commitments such as private health insurance
• The size of your deposit
• Your employment stability
• The value of the property you want to buy
• Your desired loan term, type, and interest rate

HOW TO CALCULATE YOUR BORROWING POWER

Not sure how to calculate your borrowing power? Once you have compiled data on the factors above, use this ‘how much can I borrow calculator’ to get an estimate of what a bank may be willing to lend to you. 

It will take your income and expenditure to give you an estimate of your borrowing capacity. Remember to enter realistic figures. This way you can get the most accurate assessment of where your borrowing power currently stands.

HOW TO INCREASE YOUR BORROWING POWER?

Now you know your home loan borrowing capacity; if the figure is one that will see you struggling to afford your next property, keep in mind that interest rates are expected to fall again. 

The big four banks suspect this might occur between late 2023 and 2024. The Reserve Bank of Australia has also weighed in, hinting that 2024 might see some more favourable conditions arise. Can’t wait that long to get your foot in the property market? 

We understand! Here are 4 things you can do to boost your borrowing power now. 

• Pay down your debt

In the eyes of lenders, the less debt you have, the more money you will have to service a home loan. Paying off a credit card debt of $20,000 could boost your borrowing power from $270,000 to $307,000. This doesn’t just apply to credit cards – think personal loans and car loans too. Eliminating as much debt as possible before applying for your loan can help increase your borrowing capacity significantly.

• Increase your income

If there was ever a time to consider ways to boost your income, this is it. All things being equal, the more income you can claim when applying for a loan, the more money the banks will let you borrow. For instance, using the ‘how much can I borrow calculator’ you can input different data to see that a $20,000 jump in income could mean an approximate increase of $200,000 in the amount you can borrow. A $10,000 boost in income could give you a $90,000 -$100,000 increase in borrowing power.

If it has been a while since your last pay raise, have that overdue chat to your boss about a salary review or potential overtime. It’s important to note that stable employment goes a long way here. Lenders want to know that you can make the necessary repayments. So naturally, they look more favourably upon income derived from full-time, permanent employment over those coming from part-time, contract or casual labour purely because it demonstrates a more reliable and stable income pattern.

Increasing income doesn’t have to depend solely on your employer’s generosity though. Don’t forget about side hustles, making your investments work harder and of course – investment properties and their rental income! Where possible, try to maximise your rental income by conducting regular rent reviews and increasing rent in line with market movements. 

• Reduce your expenses

Lenders need to know that you have enough cash flow coming in to meet your loan commitments. If you want to get the banks to lend you more money – review your expenses ruthlessly and make sure you are living within your means. When you are applying for a loan, banks and lenders will look at one to three months’ worth of your bank statements assessing your expenses with a fine-tooth comb. This is one of many reasons to spend time learning how to develop good financial habits.

Break down your spending into categories such as utilities, liabilities, entertainment, health etc… then assess which expenses are really worthwhile. Eliminate what is unnecessary. Cutting back on a few niceties like the convenience of Uber Eats or luxury getaways can help boost your savings.

For the expenses you can’t eliminate, compare options for each. From your phone plan to your energy provider, consider if you could get a better deal elsewhere or negotiate with your current provider. The more surplus cash flow you have available at the end of every month, the better.

• Decrease your credit card limits

Credit cards can hamper your borrowing power. Did you know that the higher your credit card limit is the less capacity banks think you have to meet your loan repayments? 

If you can’t cut your credit cards up, consider reducing the limits. The theory is that you could max out your credit card after you take out a home loan. So even if you aren’t reaching the limit each month or if your balance is zero, lenders could still view your credit card as a potential debt. In fact, every $1 of credit card limit stops you borrowing up to $5 of home loan. A quick easy phone call to lower your limit could make a worthwhile difference to your borrowing power. 

LEARN HOW TO STACK THE BORROWING DECK IN YOUR FAVOUR

Yes, the amount that you may be approved to borrow for a home loan has plummeted dramatically, but there are steps you can take and levers you can pull to put yourself in the most optimal position. Planning for your financial future, particularly amidst challenging times, can be overwhelming. The best thing you can do is get educated and get support. 

Recent Articles