API asked a few experts in the finance field to come up with effective strategies for investors to consider in their mission to boost their borrowing capacity.
1. Consolidate unsecured debts into your mortgage
Mortgage Choice senior corporate affairs manager Kristy Sheppard says rolling your personal loan or other debts into your mortgage can help your cause because they then won’t show as other financial commitments.
2. Reduce excess credit, especially credit cards
Canstar Cannex senior financial analyst Harry Senlitonga suggests closing all credit card accounts except one.
“It may sound extreme but lenders will look at the credit limit on your card or cards as a liability you may have in the future, even if you don’t owe a solitary cent currently,” he says.
3. Keep financial records up to date
One of the most common reasons borrowers find themselves well short of their anticipated borrowing levels is that they don’t have up to date financial information to prove their income levels to the lender.
Senlitonga says it’s also important to show your overall income to your lender, not just your last two payslips.
4. Select the right loan product
Even within one financial institution there can be a big difference in borrowing capacity levels based on the product you select.
“Product features such as interest-only repayments, fixed rates, variable rate discounts and lines of credit can all impact how much the lender will offer,” says Smartline Personal Mortgage Advisers managing director Chris Acret.
5. Be aware that income type is treated differently by nearly every lender
According to Acret, “Almost every lender treats income derived from dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents differently. Navigating your way around this maze is very difficult and every dollar that a lender accepts improves your borrowing capacity.”
6. Shop around
It may sound obvious but paying a low interest rate will save you hundreds of dollars on annual loan repayment commitments and thus increase your initial affordability.
7. Split your liabilities with your partner
If you’re planning to buy a property under your name only, you can split your expenses on paper with your partner, says Senlitonga.
“For example, two children as dependants may not be counted as your dependants if you can prove that your partner does and will continue to provide for them financially,” he says.
8. Use your properties as cross collateral
Using your property as cross collateral, or cross security, means you provide an existing property as a security to buy another property. But be warned, there are pros and cons with this strategy. “The good thing is it may increase your serviceability to the extent you may borrow at a higher loan-to-value ratio. This may also save you money on lenders mortgage insurance when you borrow above the lender’s threshold. “The bad thing is, in the event of you being unable to meet the loan repayments, the lender may repossess the securities, which could put your properties at risk.”
9. Extend the term of your loan
The longer the loan, the less the monthly repayments.
“Thirty-year loans for property are considered normal but not many people realise that you can now get 40-year loans in Australia,” says Senlitonga.
10. Save, save, save
Build up as much deposit or equity as possible.
11. See if a family member can ‘gift’ you funds to put towards the property purchase.
12. Be sure to have a solid employment record and don’t expect overtime to be included if it’s non-essential work.
13. Consider using your current lender for the loan as it may allow you to borrow with a higher loan-to-value ratio.
14. Consider buying with others you trust, for example friends, family, colleagues, a property syndicate.
15. Be sure to include details of all important assets on your loan application, for example savings accounts, shares held, gifted funds.
16. Consider going for an interest-only loan rather than a principal and interest loan, as the repayments will be lower. However, remember this means you aren’t repaying any of the purchase price and costs (principal), you’re merely paying the interest.
17. Consider using your superannuation to invest.