The most common question asked when we ask how much a client wants to borrow is “How much can I borrow?”.
We’ve covered this in previous blogs and spoken about not maxing yourself out on your first purchase, and considering your budget when it comes to new mortgage repayments, but we’ve not told you much about how you can increase your borrowing capacity, so here you go!
Often this is a balance of 3 x factors:
- Liabilities or Debts
- Deposit/entry funds
It’s fairly simple, and it’s not always about income $$$… So here’s the bullet points:
- Income –
Is no doubt the biggest contributor. No income, no way to repay the loan. Your “assessible” income can come from any number of sources, here’s just a few as an example:
- Regular PAYG or Self-employed income
- Rental income from investments
- Entitlements from your job such as car, uniform allowances or bonuses
- Addbacks and depreciation from business expenses (self-employed)
Everyone feels they’ve earned a pay rise each year right? Your boss may not always feel the same or be in a position to give you one. Consider the following:
- Consider the value of the company vehicle you have, and is it the best deal for you? You may have the opportunity to lease a vehicle via your employer, which will also create some deductions that can be used to bolster your income.
- If you’re starting a new job/role, think about whether $$$ is everything. With every new role comes a probationary period, and no bank likes to lend to someone who is on probation. Think about what you can negotiate in your package where you can either waive or eliminate the probation period and get you in sooner.
- Bonuses – I’ve had my fair share of experience with bonus schemes, and often they’re set just out of reach, and effected by a lot of factors outside of your control. If you want a bank to consider bonus income, you need to be able to show that you have consistently earned the bonus for 2 x consecutive years. Then they will take an average across those 2-years and deduct a MINIMUM of 20%. So what’s better, the bonus structure or negotiating a higher base pay rate?
- Overtime – You want this to be as consistent as possible. Similar to a bonus, if you want the bank to consider your overtime, it needs to be averaged over 2-years, and will also have a MINIMUM of 20% deducted. Smoothing out the frequency of overtime should be something you openly discuss with your employer.
- Liabilities Or Debts –
Existing debts can be some of the biggest contributors regarding your ability to qualify for a loan. You need to keep in mind, when a bank assesses these debts, often they don’t assess them based on your actual repayments, they build in a buffer to protect against future rises in rates. Here’s a couple of things to consider around your liabilities:
- Deposit size Vs Debts – It’s reasonable to assume, the larger the deposit, the better the deal you get. But that means bugger all to you when you can’t qualify in the price bracket you’re shopping in. So if you have a car loan, credit card or personal loan, consider the value of paying these out. You will need to balance this out making sure you still have enough to cover your entry costs, but you will also find your borrowing capacity will increase significantly.
- Credit Cards – Banks are not too concerned with how much you owe, rather how big the limit is, because you have the potential to spend up to that limit and the repayment increases along with that balance. So if you have a card you longer use, get rid of it. If you have a limit that is high, reduce it to the bare minimum you require.
- Consolidating debts – If you’re refinancing, this is the best time to consider consolidating personal loans, car loans or credit cards because you can pay those debts down much fast than their current rate. If you’re purchasing and in a situation where you have 3 x credit cards, consider consolidating them into a zero balance transfer card where it offers zero interest for a period. It will also help you pay down this debt faster and possibly reduce your limit at the same time.
- Deposit or Entry Costs –
As a rule of thumb, the minimum deposit you will require is 5% of the purchase price. There are a few products in the market that will allow you in for less than this, but that’s a much longer story for another day. If you’ve got this far, you no doubt already know that, anything less than a 20% deposit requires you to pay lender’s mortgage insurance (LMI). Then if you’re not a first home buyer, you’ll also need to factor in stamp duty costs to that the state government gets their pound of flesh also! If deposit or entry costs are an issue for you, here’s a few ways around it:
- You can receive a “non-repayable gift” from a family member or someone who can demonstrate that they have a “financial interest” in gifting you money e.g. Your parents have a financial interest is seeing you succeed. The only thing required in this situation is that you provide a statutory declaration witnessed by a JP to verify the gift is non-repayable. Depending on the bank, you may also need to provide rental statements from the previous 6-months to show your ability to make repayments on an ongoing basis that would be similar to your mortgage.
- Often parents are not comfortable gifting you funds. This conversation always goes to “what if my daughter and her partner split up, then her ex-partner benefits from the funds we gifted our daughter”. Worry not! There is a product out there that can protect you against this happening also. It’s a really long explanation, but at the end of it, your parents money is protected, your entry costs will be reduced and everyone gets what they need!
- Borrowing for entry costs – there are very few banks that will consider this. How it works is that you take out a personal loan to make up the shortfall in deposit funds you require. The catch is that you have to be able to demonstrate you can afford the mortgage and personal loan repayments at the same time.
- There are 2 x trains of thought around paying LMI, those that hate it and those that hate it… It’s money for nothing. If everything goes pear shaped, it only covers the bank, not you. I could make arguments all day around why it’s a waste of money, but I could also argue the latter… Here’s a few to consider:
- If you need an extra $20k for your deposit, try and save that in a year while paying rent and all of your other bills. It will require you to put away no less than $384 PER WEEK to achieve that goal.
- Let’s say you’re currently renting for $400 per week. While you save that extra $20k, you’ll pay $20,800 off someone else’s mortgage while you ATTEMPT to save.
- You will start accumulating equity in your home from the day you buy it.
- The equity you build in your new home is your starting point for a deposit on your next purchase.
- If finance and having a secure future is a passion of yours, you’ll no doubt have listened to any number of podcasts by money professionals who spruik that you should have multiple income streams. Home ownership is a solid foundation to build as one of these income streams.
- If it’s an investment you’re using, a good accountant will find opportunities to reduce how much tax you pay with use of negative gearing the investment. Additionally, the rental income can be used in servicing.
- You will qualify for sharper deals on other finance because you’re a home owner e.g. car loans, this is a major contributing factor.
The only constant when talking about borrowing money is CHANGE. During our time as mortgage brokers, we have seen a lot of change around how income, living expenses and borrowing are treated. It’s hard to keep up with, no 2 x banks are the same, and everyone is competing for your business.
That’s why you use a mortgage broker like me! Yes, we are based in Palm Beach on the beautiful Gold Coast, but the majority of our clients are often interstate. The only barriers between us are the mental ones you create, similar to some of the issues you may have created for yourself around your next property purchase! The longer you wait, the longer it takes. Prices go up, interest rates will definitely go up (currently at historic lows).
So what’s stopping you from taking the leap? We do all the work. If you like what you’ve read here, or even find our perspective intriguing, please reach out, let’s have a chat. We’d love to work with you!