In this week's episode, we're going through how to increase your borrowing capacity. People struggle to get loans initially, and it's only becoming harder because APRA is tightening lending requirements. This is really just, how much people can take out and we'll go through seven practical tips.
This is all simple stuff and whether you're looking at buying in the short term, or medium to long term this will affect building your wealth and your property journey.
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Tip 1: Reduce credit cards and don't get debt because it seems like a good idea at the time! A lot of people think that they need to get a credit card for credit history when this is actually wrong. At the moment they've only got negative credit reporting. It's more about having a good credit file, you don't need to establish history.
Reduce any credit card owing you have. If you've got a $10,000 credit limit this will reduce your borrowing capacity by $40,000. So essentially, four times the credit impact. Even if you have no debt owing on the $10,000 credit card - it will still be assessed as if the whole thing is debt, as the assumption is that you could go to the casino and spend that whole $10,000.
Tip 2: Clean up your unsecured debts Secured loans - a mortgage is a secured loan because the bank can sell it if something happens. An unsecured loan is a credit card because there's no collateral or security against it. You can go to the bank and they'll give you $15,000 to have a holiday, but you will pay huge rates aginst that and it will affect your borrowing capacity. If you default on the $15,000 holiday loan the bank will have a hard time getting its money back. Even a small car loan will affect this. Just $500 a month ends up decreasing your borrowing capacity by over $80,000. It's amazing how those small things do add up and can affect your ability to grow a portfolio. There's good debt and bad debt, and car loans like that should be paid as quickly as possible so that they don't affect your borrowing capacity. If you've got an existing property, you could look at debt consolidation, where you increase your home loan to add your car loan onto it. The trap here is that the extra $10,000 they keep for 30 years so the interest costs are higher. Speak to a broker about this before doing it! Tip 3: Sort out your paperwork
As a mortgage broker, I see how bad people are with paperwork, but this is so important! You need to have your group certificates, rates notices, pay slips etc. all ready to go. It's amazing how disorganised people are with this. Get your paperwork in check because this can affect your borrowing capacity. So go through a pre-approval process first so that you don't need to waste time when you're ready.
Get your paperwork in check because this can affect your borrowing capacity. So go through a pre-approval process first so that you don't need to waste time when you're ready to move forward with things.
No one likes paperwork but unfortunately, it is necessary. If the bank is lending you $500,000+ a few pieces of paper are necessary!
Tip 4: Shop around for deals between banks
You need to look after yourself, which means ensuring that you're getting the best rate. If you want to get into investing, look at different lenders and deals because these small differences can really hold you back.
There are two things that make a difference.
How much the bank will lend you
If you've got a combined income of $85,000 - between lenders there can be an $139,000 difference between them. So doing your research can make a huge difference.
Now, this isn’t just limited to home loan rates because, surprisingly, different banks can potentially increase your borrowing capacity. If you have a look at the scenario we have put together below for 2 adults, no kids and a combined annual income of $85,000. There is over $139,000 difference in how much Lender A and Lender G will lend the couple!
Lender A $465,900
Lender B $456,438
Lender C $427,258
Lender D $411,000
Lender E $399,508
Lender F $361,459
Lender G $326,516
Lenders mortgage insurance
There can be a huge difference again between banks. For example between them, there could be a $6,000 difference on how much insurance you pay the bank. This is compounded over 30 years equates to almost $30,000 over 30 years, four times the amount. LMI is a good tool if you need it, but if you are going to do it make sure you find the best rate.
Tip 5: If you have split loans with someone else, show how you are sharing them
If you have owned property with friends or family members in the past you may own 50% of the property. Therefore, you own 50% of the home loan associated but in the eyes of some banks, you are considered wholly liable for the debt even though you only own 50% of the property.
Fairly or unfairly, they assume you need to make 100% of the loan repayments but are only entitled to 50% of the rent. This can severely decrease your borrowing capacity.
Tip 6: Consider extending your loan
Again, this is situational. If you can extend the term of your home loan is it really a good idea?
Pro - extending the term of the loan means you can borrow more with fewer repayments each month
Con - more interest because it's a longer period
This is something to seek advice on and proceed with caution.
Practically, this would look like:
$300,000 loan at 5% over 25 years - $1,753 per month with the total interest payable $226,131
If you, however, looked at extending the loan term to 30 years, it would look like this:
$300,000 loan at 5% over 30 years - $1,610 per month with total interest payable $279,767
Tip 7: Save!
Save! Anyone who has been successful in generating a number of properties has great cash flow management. To do that, you've got to have the ability to save money!
If you have more savings in the bank, the bank will lend you more money. The more cash you put towards a property, the more the banks will give you.
The boring stuff is true.
In summary Reduce your credit card limits! You can do it online or call your bank. Shop around for different banks or get someone else to do it for you. Having more savings, if you've got a bigger deposit you can avoid lenders mortgage insurance. The more you have, the more the bank will lend you. Long term, the banks want to see you at 60 - 70%, if you're too highly geared, you're very susceptible to issues. Try to have them positively geared, as this income is the one thing you can control.
Make sure you are working with a professional mortgage broker like the team at Red & Co to maximise how much you can borrow, and grow your property portfolio in a sustainable way. Also, check out Louis' podcast SelfMadeMil.com.au