Before you apply for a loan, it’s a good idea to get your financials in the best possible position. By improving spending habits, increasing your income, and making a few tweaks to your outgoings, you could significantly improve your borrowing power and therefore have more to spend on a property or other assets.
Asking your boss for a pay rise can be an awkward conversation, however a positive outcome could potentially boost your borrowing capacity. Banks often want to see three months’ of pay slips so make sure you ask well ahead of time. If you decide to change jobs or start a side hustle, lenders will often look at how long you’ve been in the new role or had the new venture – the longer the better. Checking if you’re eligible for any income support payments through Centrelink could also assist. Every little bit helps.
When working out your borrowing capacity, lenders will almost always subtract how much you spend from how much you earn. Moderating your spending can help to boost your capacity.
–Monitor discretionary spending: Trim down on life’s little luxuries like take-away coffee, Uber Eats and streaming services.
–Shop around: It pays to shop around for better deals on services such as insurance, mobile phones and utilities. You could be paying more than you should. Switching providers or negotiating a better rate with current providers can make a difference.
–Review subscriptions: If you’re paying for subscriptions or memberships, you barely use such as the gym, streaming services, club memberships etc, this could be a good time to cut your ties.
–Move back home: Not an option for everyone, and some people’s worst nightmare, but if you’re currently paying rent, this could be a big money saver. Setting expectations and deadlines around how long you intend to stay can make this option more appealing to all involved.
How much could you borrow? Use our handy calculator to get an indication of your maximum borrowing limit and what your repayments would be.
When it comes to working out your borrowing capacity, lenders won’t just look at your credit card debt, they’ll also take into consideration your credit card limit. Lenders will often calculate your borrowing power based on you having ‘maxed out’ your credit cards. For this reason, consider getting rid of credit cards or reducing the limit.
Before you apply for a loan, try to clear as many debts as possible such as personal loans, car loans, credit cards etc. Buy now, pay later platforms also raise eyebrows, so best to steer away from these. If you’re not able to reduce debts, consider consolidating your other loans into your home loans.
Banks will usually want to see some form of genuine savings which proves you’re financially responsible. At the same time, having a larger deposit could also mean your loan-to-value ratio decreases, making you a less risky proposition.
If you don’t have a regular savings plan, now is a great time to start. Work out the amount you can afford to save each month. Then open a savings account and transfer that amount each month – or even better, have it auto-deducted.
Complete your tax returns and have up-to-date information on your income, which will save you time and minimise any hassle when applying for a mortgage.
The higher your credit score, the more likely a bank is to lend to you. Every Australian who’s used credit has a credit score. Your score considers how often you’ve applied for credit, your repayment history, whether you’ve defaulted, and whether you’ve had any adverse financial rulings made against you.
If you don’t know your score, now is the time to find out. (It’s free to contact a credit reporting body to review your history and check it’s accurate. If you’re not happy with the report, engage the assistance of a credit repair company to help clear your credit issues. You can also improve your credit score by ensuring you pay your bills, rent and loans on time and hold off making any unnecessary credit applications.
Every bank uses its own criteria for calculating borrowing power. Good mortgage brokers will know which ones are most suitable for your financial situation. They will also guide you through the process of applying for a home loan so you’re in the best position to secure the finance you need. Nectar brokers are experts in finding the best lender for your situation – give us a call to discuss your options.
It’s important to check that what you’re buying is worth the amount you’re asking to borrow. This safeguards you just as much as the lender. Do your research, compare other properties in the same area or talk to a trusted valuer.
Lenders typically view self-employed workers as higher risk simply because their income fluctuates, compared with someone on a regular income. To improve your chances of approval, lenders usually like to see a bigger income and consistent cash flow. By engaging an accountant early in the process, their advice and expertise can help ensure your financials satisfy the requirements of the lender.
If you found these tips helpful and would like to further discuss your borrowing potential or require a broker to guide you through the home loan process, contact us today