With lending standards getting tougher by the day, aspiring first home buyers with low deposits are up against it when it comes to maximising their borrowing capacity for their first home loan. However, first home buyers can take matters into their own hands and do some things themselves to increase the borrowing capacity. Below, we take a look at 5 of the simplest but effective methods of increasing your purchasing power.
Disclaimer: Please note our website, including this article, is in no shape or form designed to replace the need to obtain professional advice from experts such as Mortgage Brokers. We always recommend you speak to a licensed professional to determine the type of home loan that is best for you. Please visit our website’s Terms & Conditions for more information. To speak with a licensed Lending Adviser please click here.
Since lenders have become less lenient of recent, increasing your borrowing power using these simple methods could mean the difference between buying your dream property or compromising and buying a smaller property (or one that is not in your ideal location). The simplest ways you can increase your borrowing capacity include:
1. Reduce your credit card limits
A lot of aspiring first home buyers believe that if you don’t use your credit card or if you pay it off every month, the credit card limit is not of any significance when it comes to applying for your first home loan. However, it is important to note that this belief is incorrect.
Your ‘Credit Limit’ i.e. the amount of money available to use on your credit card, is the figure the lenders will take into account when determining your credit card liability. Usually, lenders will include 3% of the credit card limit as an expense when determining your monthly expenses.
So, if you have excess credit cards that you don’t need, we suggest you lower the credit card limit or get rid of them altogether if you don’t intend on using them after getting your first home loan.
2. Maximise your deposit
This method is a no-brainer but the higher the deposit, the more you can borrow. Generally speaking, lenders will require 5% in savings, at a minimum.
The below table shows a simple illustration of how a higher deposit will increase your borrowing capacity (Note: the table below assumes LMI is fully capitalised beyond the loan amounts illustrated below):
| Deposit Size | Maximum Purchase Price | |
|---|---|---|
| 5% | 10% | |
| $20,000 | $400,000 | $200,000 |
| $30,000 | $600,000 | $300,000 |
| $40,000 | $800.000 | $400,000 |
| $50,000 | $1,000,000 | $500,000 |
3. Pay off personal/car loans
In most cases, car loans & personal loans come with much higher interest rates and shorter loan terms, which means the repayments on these loans tend to be comparatively higher than a home loan. For this reason, it is a good idea to pay these debts off as not having these loans can improve your borrowing capacity quite significantly.
Some lenders even sensitise your existing loan repayments i.e. put a buffer on your current repayments, to ensure you can continue to afford your repayments in the event of interest rates going up. However, most lenders will take a more sensible approach and just take into account the actual repayments of your existing car/personal loan repayments.
There are cases where it may be worthwhile saving your money rather than paying off your existing loans, especially where your income is high enough to afford a home in your dream location, even with your current ongoing commitments staying the same.
There are several strategies you can use to maximise your borrowing capacity
4. Increase the loan term
This option may not be available to everyone, but the increased competition in the financial sector means there are some Australian lenders who now offer loan terms higher than the standard 30-year loan term. Increasing the loan term beyond 30 years will have the impact of increasing your borrowing capacity as your repayments will be split over a loan term of 35 or 40 years.
Whilst this method does increase your interest costs (if you calculate the interest you have to pay over the life of the loan) it is a particularly good option if you are looking to get into the market and buy your dream home as soon as possible. There is always the option of either repaying your loan down faster down the track or refinancing to another lender offering a shorter loan term in the future.
5. Stop the guesswork and speak with a qualified expert
When we say speak to an expert, we don’t mean a single financial institution or bank. We mean a Mortgage Broker, Lending Adviser or FHBA Coach. They don’t just recommend the loans of one lender, they explore a range of lenders and give you options so you can decide which lender is best for you.
Not only does a mortgage expert give you lending options, but they are also qualified to provide advice on how you can maximise your borrowing capacity to ensure you can buy that dream home. Our FHBA Coaches deal with dozens of different scenarios on a daily basis, therefore we are well positioned to give you suitable advice on the method you should undertake to increase your borrowing capacity.
To get started with your first home loan process or to determine how you can maximise your borrowing power, simply complete the form below
Written By,
First Home Buyers Australia
