With a rate cut comes an increase in property values … But the higher prices might mean you now need to borrow more.
Here’s how to make yourself more appealing to a lender.
Be honest with yourself
While rate cuts will improve borrowing power, be warned they won’t necessarily bring homeownership dreams closer in reach. Rather than helping people reach their property goals faster, they may just end up paying more as a result, as bigger deposits threaten to push up property prices.
I really encourage people to run a mortgage stress test before making use of their improved borrowing capacity. If you max out on your loan, you could find yourself in a difficult situation, should your circumstances change down the track. Your debt-to-income ratio is an important consideration, not only for banks to assess your capacity, but for you to understand to ensure you have enough money to live on while paying off the mortgage.
Generally, a good rule of thumb is to ensure you’re not spending much more than a third of your income on repayments. You want to ensure you’ve got plenty left over for your other bills and expenses, and some to put aside for saving and emergencies.
Tips for boosting borrowing power
Here are some steps to take to enhance your borrowing capacity:
- Reduce your credit card limits or get rid of them. When lenders calculate borrowing power, they use the entire credit card limit, rather than the balance, as part of their serviceability calculations. Therefore, reducing your limit or closing your credit card may help boost your borrowing power. According to a Compare the Market analysis, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $552,000 to $505,000.- a difference of $47,000.
- Know your credit score. Websites like Compare the Market provide free credit score checks to help you understand how strong your borrowing position is. Lenders use your credit score and credit history to calculate risk when assessing your application. Improving your credit score is one way to improve your chances of being approved.
- Consider a joint purchase. You could team up with a family member, partner or friend if your borrowing capacity isn’t high enough and you’re struggling to meet the lender’s income requirements. Joint purchases have become a popular way for many to break into the property market. Two incomes are usually better than one, so you may find your borrowing power increases with an additional person on the loan.
