Finding ways to increase your borrowing capacity has become more challenging against a tide of rising interest rates, tighter loan-to-value ratios (LVRs) and stagnant or falling property prices.

High inflation has also seen “real” wages of many workers take a hit.

With your borrowing capacity reduced, it makes it that much harder to secure the funds you need to buy your dream home or grow your investment portfolio.

Twelve rate rises by the Reserve Bank of Australia have eroded the average Australian family’s borrowing capacity by almost $250,000.

Singles have lost $180,000 in borrowing capacity in the same 14 months (to June 2023).

So how can you increase your borrowing capacity while so many economic winds are blowing in the wrong direction?

It’s not as difficult as you might think.

Reduce your debt

Debt is the number one killer when banks are assessing your ability to repay a loan.

They won’t just look at the size of your home loan.

They’ll want to know about personal loans, student loans, car loans and any other outstanding debts.

Eliminate as many of these as you can before applying for a new loan.

If you can’t eliminate them, try consolidating them into one loan.

Your home loan interest rate is normally the lowest so by rolling them all into that, you can save thousands and significantly increase your borrowing capacity.

Cut up your credit card

If you’re serious about increasing your borrowing capacity, cut up your credit card.

If you refuse to do without it, call your bank and significantly reduce your card’s credit limit.

And get rid of any extra credit cards you may have.

That’s because when banks are assessing your suitability for a loan, they look at credit loan limits and worst case scenarios.

Hence, if you have a $20,000 limit on one card and another two with $10,000 limits, they’ll slate you for up to $40,000 of potential debt.

Be sure to close off any other platforms you also use that allow you to buy now and pay later.

Use your existing equity

Lenders have been reducing their maximum LVR ratio in response to economic conditions.

In most cases, you’ll need a deposit of at least 20% to secure a new loan.

A great way to do that if you have an existing property is to use the equity you already have to increase your deposit.

That equity will grow as you pay off your mortgage and as the property appreciates.

Making improvements or renovations to your property can also add to its value and hence grow your equity.

This has the flow on effect of boosting your borrowing capacity for a new property.

The higher your deposit, the greater likelihood you will avoid lenders’ mortgage insurance which erodes your borrowing capacity.

Refinance your home loan

Refinancing your loan to a lower interest rate is another shrewd way to reduce your debt.

This will in turn allow you to increase your deposit as well as your borrowing capacity.

Home owners who don’t do their due diligence in this area are missing a trick.

They are potentially costing themselves hundreds of thousands of dollars along with the ability to borrow more money and grow their investment portfolio.

Mortgage brokers have access to all the rates and terms from the myriad of banking and non-banking lenders and offer the best available deals to their clients. 

Update your financial records

Keeping your financial records current is imperative if you are applying for a new loan.

If you can’t prove your income, show your expenses and financial position, no lender on the planet will lend you money.

Here’s what you’ll need:

  • tax return
  • last 3-4 pay slips or bank statements as proof of income
  • evidence of additional income from property, stocks and shares
  • credit card statements

The self-employed often find it harder to prove their income and will need to provide alternative documents such as:

  • income declaration 
  • accountant declaration verifying your declared income
  • up to your last four BAS statements
  • business bank statements from the last 3-4 months 

Timing is everything

The old saying very much holds true when applying for a loan.

Ensure your recent repayment history is impeccable.

If you own a business, wait until you can show receipts that indicate strong turnover and a positive outlook.

If you are an employee who has just had a pay rise or you are paid regular bonuses, they count as income, as long as you can show they have been paid for the last two years.

Increase your income

There’s no better time to ask the boss for a raise if you need to increase your borrowing capacity.

Even a small increase can make a difference.

Alternatively, consider a second job or side hustle to bring in some extra cash.

But don’t delay because banks will want to see three months’ worth of pay slips when assessing your suitability for a loan.

Reduce your discretionary spending

Lenders examine spending habits when assessing your ability to pay back a loan.

There are many expenses we tend to make on a weekly or monthly basis.

If you can do without some of these, you can start to make significant inroads into your borrowing capacity.

How many of these “luxury items” do you really need?

  • expense of a second car
  • gym membership
  • pay TV and music streaming platforms
  • Uber Eats
  • take out coffees

Get advice today

By soliciting good advice and employing a raft of strategies, you may be able to significantly restore your borrowing capacity.

It may even approach the level it was before the RBA’s interest rate rise onslaught!

The most important thing to do is act now, working with an experienced mortgage broker to help you find the best home loan deal based on your strategy.

Calder Finance Broking are specialists in the mortgage broking business.

We can help you refinance with your goals front of mind – whether that’s getting the lowest interest rate, increasing your deposit or growing your borrowing capacity to help you realise your home ownership or property investment goals.

We’ll advise you on the most prudent mortgage strategies for your circumstances and ensure you are always taking advantage of the very best loan deal on the market.

We pride ourselves on leading our clients into the future with structure, financial stability and confidence. 

Contact us today to discuss all of your financial needs and concerns.

The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a mortgage broker and/or financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on our interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Written by David Tilley from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.

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