How to improve your borrowing capacity

Mortgage solutions to improve borrowing capacity

There are a few ways to not only secure that all-important home loan, but improve your borrowing capacity as well.

When considering your application, financial institutions must demonstrate they are satisfied that you can afford to repay their debt. If they don’t do this, they risk their right to foreclose your loan in the event that you default.

One of the key tools used to determine your ‘serviceability’ – the ability to repay the debt – is the Ability to Repay Test. However, Australian lenders interpret these guidelines very differently which means the loan amount that might be on offer could differ greatly.

A recent survey of 22 mortgage lenders to test the borrowing capacity of a single borrower on a gross annual salary of $60,000 and a credit card liability of $5000 found the most frugal lender was prepared to lend $277,000 while it was as much as $372,000 with another.

This shows the broad range within which lenders interpret a borrower’s ability to repay – and the importance of shopping around.

Lenders have tightened their Ability to Repay calculations in response to the GFC in recent years which means that while getting a loan isn’t an insurmountable task, it is a lot more challenging and time-consuming to wade through policies, loan types, rates and lenders.

That’s when the advice and guidance of an experienced mortgage adviser can be valuable.

Here are some ways to meet the Ability to Repay Test:

1. Consider consolidating unsecured debts into your mortgage.
   Personal loans and credit cards with short repayment terms can force you to reduce your debts with expensive monthly repayments. These high repayment levels impact the banks’ Ability to Repay Calculation for your mortgage because unsecured debt limits the amount of uncommitted funds you have available to repay the proposed mortgage.
2. Cancel those unwanted credit cards and reduce limits on others.
   Unused credit cards or credit card with limits that far exceed your needs should be cancelled or the limits reduced to a manageable level. It doesn’t matter that the card may have a zero balance – most lenders assume that your credit card will be fully drawn up to its limit.
3. Keep financial records up to date.
   It’s common for borrowers find themselves well short of anticipated borrowing levels by not having up-to-date financial information. Simply completing tax returns on time can help your mortgage adviser secure your loan.
4. Select the right loan product.
   Even within one financial institution there can be big differences in borrowing capacity levels based on the product. Interest only repayments, fixed rates, variable rate discounts and lines of credit all impact how much the lender will offer.
5. Shop around – income type is treated differently by nearly every lender.
   Lenders are selective when it comes to the type of income they accept. Some income types may be excluded all together by one lender and fully included by another. Almost every lender treats income derived from dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents differently.