Discover How To Increase Your Borrowing Power

Discover How To Increase Your Borrowing Power

Do You Know Your Borrowing Power?
Learn How To INCREASE It!

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The Essential Borrowing Power Guide

When you’re looking to purchase property, refinance to a better rate or release equity from your home, one of the first steps you should undertake is to find out what your borrowing power is, or how much your lender is willing to lend you.

Here, you’ll learn what is meant by your borrowing capacity, what impacts it and how it’s calculated. Then we’ll provide you with four tips on how to improve it.

By the end of this article, you’ll have a better understanding of what you might be able to borrow and how you can potentially increase your borrowing capacity.

However before we start, if you’re also into getting other savvy home loan tips about Australian mortgage products, you can go to our home website and take a look around. If you’re into saving money and getting ahead financially, it’ll be time well invested.

What is borrowing power?

So, how is borrowing power calculated? Although the exact criteria will differ from lender to lender your borrowing power will be calculated based on the following:

How Does Cash Flow Add Up to Strong Borrowing Power?

Your income is one of the most important factors when calculating your borrowing power. Your current and future income situation indicates to the lender how you are going to be able to meet the ongoing nature of the repayments?

Income used for borrowing capacity purposes can be derived from multiple sources such as employment, rental, income dividends or other investments.

Whatever income is being used, the lender will want to confirm the ongoing and sustainable nature of the income source, your asset and liability position, as well as ongoing and other living expenses.

You can access our free borrowing power calculator here.

Will Your Assets and Liabilities Tip the Scales?

A strong financial position shows your ability to handle money and expenses. If you own enough assets or have sufficient equity in your property, you will be able to use this equity as collateral and can also increase your borrowing power.

If you have little to no existing debt and a high asset position, you’re more likely to have a much higher borrowing power than someone with much more debt and a lower asset position.

E.G Even if you have a credit card with a $0 balance that you pay off each month with a high limit, the lender will still use the limit in order to calculate your borrowing power.

You see, as far as they are concerned your capacity to borrow against that credit card limit is viewed as a liability to them. They’re worried you’re going to jump on a cruise liner tomorrow and run the credit card balance up to the limit in the ships casino (lol).

Are You a Spendaholic?

Expenses are broken down into both discretionary and non discretionary expenses. Discretionary expenses are expenses that can be changed, such as eating out at nice, restaurants and lifestyle expenses.

Non discretionary expenses are the mandatory expenses that need to be paid back each month. For example, a non discretionary expense can be something like insurance or childcare, or even groceries, Something that must be ongoing and paid back each month.

If your lifestyle expenses are high, this could in all likelihood impact your ability to borrow, and in some circumstances you may even need to justify some non-discretionary living expenses and the ongoing nature of these outgoings.

Understanding the Importance of the HEM Protocol

In today’s residential/consumer lending market lenders have to observe and comply with the National Consumer Credit Protection Act (NCCP) or responsible lending act.

The main benchmark for this policy is measured against what is known as the Household Expenditure Method (HEM). This pre-determined benchmark amount will have an impact on your borrowing capacity.

There are varying benchmarks used for the number of people in your immediate family circle. E.G. you’re single, you’re a couple, your single with kids, you’re a couple with kids etc.

The more people that are in the immediate family circle means the higher they will judge your regular living expenses to be. Therefore, the (HEM) has pre established higher benchmark amounts for each size group.

Of course, you can debate whether you fit the mold, but if you’re under the pre-determined benchmark, then you have to come up with a practical explanation.

When Was the Last Time You Saw a Copy of Your Credit Report?

Last but not least, your credit history will also impact your borrowing power significantly. If you want to get an estimate of how much you can borrow use this link to access our free borrowing power calculator.

What can you do to help increase your borrowing power?

The best way to increase your borrowing, power and chances of credit approval are to indicate to the lender that you’re financially sound and can meet your loan repayments.

A simple way is to get rid of unnecessary debt and credit cards. How much debt you currently have will influence your borrowing power to a great extent. Having unnecessary debt, such as credit cards that you don’t even use could significantly deter a lender from the amount they’re willing to lend you.

Another way is to reduce your expenses. Lenders want to know that you can comfortably meet your repayments and if they sense you might be living week to week and could be at risk of mortgage stress, this can significantly affect your borrowing power and even your ability to get approved for any loan.

How Good a Money Manager are You?

Looking up the curved driveway to a nidely restored residential home

It’s smart to regularly review your expenses and see if you can cut back on any non discretionary expenses such as the gym membership you never use.

Be aware, in today’s regulatory mortgage market banks take a very close look at how much net money you have coming in and how much of that you have going out.

They have terms like NSR (net servicing ratio), DTI (debt to income ratio).

The bottom line is, the lender will take close note of what your net income is (after tax and any other compulsory deductions), from that they will subtract your living expenses and your financial liability repayments. Then they will take a hard look at what you have left as well as the ratio of your debt to net income percentage.

Many can be left scratching their head, because even though they have a good income, have never defaulted or have never ever paid late on any loan, but they still get declined.

It’s good idea that you review your financial position and adjust it to your best financial advantage before divulging any of your financial information to a prospective lender. Seek out an experienced mortgage broker to help you with this.

What Does Your Savings Track Record Say About You?

Having a good savings history indicates to the lender that you are financially sound and if your circumstances do change in the future, you have a much higher chance of being able to meet the ongoing nature of the repayments.

At the same time, if you are purchasing property the larger the deposit equals the less amount you’ll need to borrow.

What Importance do Lenders Put on Credit Scores?

Lastly, you want to be aware of and try and improve your credit score. Your credit report is a reflection of your credit history and includes things such as all inquiries you’ve had, for any credit, as well as any hardships such as defaults.

Having an adverse credit history or a bad credit score can significantly reduce your borrowing power, as it indicates to the lender that there’s a much higher risk of default on the loan.

What is considered a Good Credit Score?

You will find that any credit score can vary depending on which credit scoring model you are using. Generally though, if you score between 580 to 669 that’s rated as fair; If you end up between 670 to 739 that’s rated good; from 740 to 799 you’re getting into the very good marker; from 800 and up is rated as excellent.

You can get a free credit score report here

If you want to learn more about credit scores contact a knowledgeable mortgage broker.

There you have it, the essentials you need to know about borrowing power and the four tips you can use to help increase yours. If you’re looking for more great tips click through to our main home website page and fossick around where we talk all things home loans. We hope you have found the above helpful…

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Why is the Bank Saying I can’t Service a Loan?

Why is the bank saying I don’t have Enough Borrowing

mastermortgagebrokersydney.com.au - young lady holding up her hand in front of the camera showing 5 fingersA question we often get goes something along the lines of: ‘I make my repayments on time, and I save $1,000 per month, why is the bank saying I can’t service a loan?’ Here’s how banks conduct loan serviceability.

When a bank calculates loan serviceability, they are essentially evaluating your ability to pay back a loan.

Lenders base this decision on a number of factors, including your income, the loan amount, and other commitments or extra expenses.

With all of these things in mind, the bank figures out a debt service ratio (DSR). In a nutshell, the DSR is the percentage of your monthly income expected to be spent on debt expenses.

Lenders usually cap this at 30 or 35%.

How banks conduct loan serviceability

Of course, the borrower’s standard salary is considered here. But so too are bonuses like overtime, commission, and even company cars.

For nurses and the emergency services, all overtime payments are included in serviceability calculations.

For other professions where overtime payments are more infrequent, only a proportion of overtime is included.

If you have a second job, you must be employed there for a year before this income affects serviceability. And for investment properties, most banks will consider just 75% of the rental income (to allow for associated fees).

Lenders can also take into account Centrelink benefits like Family Tax Benefit if your children are younger than 11-years-old.

Reasons why loans can’t be serviced

If you have been making all of your repayments on time and saving a decent chunk of your income, you may well be wondering why a bank has just knocked back your loan application.

One explanation may be that lenders calculate repayments by adding a margin of 2.5% or more to the variable rate. This is known as an ‘assessment rate’. It’s used to predict whether you would be able to meet repayments if interest rates rose to 7.5 or 8%.

Unfortunately, this – as well as credit card debt, student loans, car loans and the number of children or dependents living in your home – can negatively affect loan serviceability and make it much harder to get the finance you need.

Bearing these factors in mind we can help you rearrange your finances and improve your chances.

How we can help

If you’ve recently been advised by a lender that you can’t service a loan, don’t hesitate to give us a call.

We’d be more than happy to look into your individual situation, help you address any issues, and line you up with a lender that’s offering a great home loan.

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