11 Tips to Boost your Borrowing Power

Graeme Salt

Buying property frequently involves borrowers extending their borrowing capacity. Here are 11 tips on how you can get the most so you can get that dream home.


 


1 Boost your income


Your ability to repay your loan is one of the biggest factors that banks will look at when determining how much to lend to you. While it is blindingly obvious that, the more you earn, the more you can borrow, other factors come into play. If say, you are someone who has been salary sacrificing, you may want to stop this so that you can boost your spending power


 


There are also occasions when the opposite applies. Many public health workers, for example, have special packages that allow them to make mortgage payments after salary sacrificing. This means that the money allocated for their mortgages is actually paid with pre-tax money.


 


2 Know your onions


When we ask ourselves whether we can afford loan repayments, we frequently look at the current rates. However, the lenders normally take a more conservative stance – they use what is known as an assessment rate to ask, if rates were to go up, whether you could make the loan payments.


 


But, not all lenders’ assessment rates are the same. Many will add two percent on to the current rate to ask if you could cope with higher repayments. But some only add on one and a half percent; this makes a huge difference in assessing whether you could make the payments on, say, a $750,000 loan.


 


3 Rental matters


Just as the banks take a conservative stance with interest rates, for investment properties they are also cautious about the rents a property can achieve. So, when looking at your potential income they will predominantly only factor in 80 per cent of any rent your investment property may achieve. But, AMP can take into account all the rental. I recently arranged an AMP investment loan with a low-salaried client for that reason.


 


4 Spread the load


I mentioned assessment rates above – when banks test whether you can make repayments when rates go up. Some banks take really cautious positions with assessment rates and use assessment rates on all client’s debts (no matter which bank they are with). Clearly, this greatly reduces your borrowing power. But other banks, such as Homeside, only use assessment rates on their own loans – the rest are factored in at actual rate. So it is often worth your while to have different loans with different lenders.


 


5 Know what constitutes ‘genuine savings’


Most lenders require you to have a deposit comprising genuine savings. Typically, ‘genuine savings’ means money that has been saved over a period of at least three successive months. For most lenders, one-off payments are excluded, but some will consider some of these items when assessing your deposit, if you can provide a rental payment history, for example.


 


6. Maximise your deposit size


Lenders will look favourably on you if you have a large deposit, and a larger deposit can bring about a better chance of getting the lowest possible interest rate from a lender and the reassurance of already having equity in the property. First time buyers may also be able to increase their savings by opening a First Home Saver Account. These accounts attract a lower rate of tax on the interest earned but the real beauty of them is that the government will also kick in 17 per cent of any deposits you make up to $5,500 a year. So if you deposit the full $5,500 in one financial year, you'll receive another $935 from the government.


 


7 Ask your mum


Parents are often keen to give their kids a helping hand when it comes to buying property. But, sometimes the initial costs of a home purchase are too much for a first homeowner. One way around this is the parental guarantee scheme that many banks offer. The guarantee often enables first home owners to borrow to pay stamp duty and avoids the need to take out Lenders Mortgage Insurance.


 


8 Reduce existing debt


Cut as much of your other debt as possible, such as car and other personal loans, credit and department store cards, and HECS debts. Be aware that with credit and store cards, the amount owed isn’t what matters to the lender, they’ll factor the overall credit limit into your ability to repay the loan. Plus, if you share a loan with someone else and you want to take out another loan in your own name, most lenders will assess your loan application based on your ability to repay the full loan amount of the existing loan – not just your half.


 


9 Clean up your credit file


Have you ever had an unpaid gas bill and not known about it? I have. And I have seen loan applications turned down because of them.


 


Before you apply for a loan you may want to get a copy of your credit file via http://www.mycreditfile.com.au (it’s free). Then, if there is a random outstanding Telstra bill, you can pay it off before the bank knows about it.


 


10 Think Ahead


As I write this, my colleague has just got off a phone call with someone who wanted a home loan. This person was earning $200,000+ but had just decided to set up his own business. He had not imagined that, without any history of business income, he would not be able to get a loan. If you have had multiple jobs in a short period of time the banks become concerned as to whether you really are in for the long haul. The same applies with people on probation in a new job. Thankfully though, there are some good banks that will lend in that situation.


 


11 Shop around


Lastly, talk to an experienced mortgage broker who has access to a large number of lenders. Good brokers know where the deals are plus they know which banks have the most generous policies.


 


Graeme Salt is a Sydney-based mortgage broker.  He can be contacted on 02 9922 5055.