If you’re interested in buying property or renovating your existing home, it’s worth knowing your borrowing power and what contributes to how much you can borrow. If you know how you can improve your borrowing capacity you may be a step closer to your next home or investment property.
All lenders look at your ability to repay the loan. To determine this they look at a number of factors to work out your:
- capacity to repay
- financial risk
- collateral / security
- existing assets
Credit cards can greatly impact your borrowing capacity
Did you know that your credit card limit directly impacts the amount you can borrow for your mortgage? With a simple change it can also be one of the quickest ways to increase your borrowing capacity.
Most people don’t realise that lenders don’t just look at the outstanding balance of your credit cards and your minimum monthly repayments, they look at what your total repayments would be if you used the credit card limit in full – even though if you aren’t anywhere near your limit!!! Did you know this???
Can I have an example please?
Let’s say you have credit cards with combined card limits to the value of $17,500, with a current outstanding balance of $4,500 in total. The lender will calculate the minimum monthly repayment on the maximum credit limit of $17,500 NOT the actual $4,500 balance. You if you are applying for a loan, the lender will assess your application based on possible repayments of $525 per month as opposed to the $135 per month you are actually paying (at the time of your application). That is a difference of $390 per month that could be used as borrowing capacity towards the repayment of a property loan!
What can you do to improve your borrowing power?
- Consolidate your credit card debt and cancel unnecessary cards. This will reduce your monthly interest repayments and free up income for other repayments. Do you really need more than one credit card if it is directly impacting your borrowing capacity?
- Reduce the limit on your cards to the minimum practical amount for your personal situation.
- If you have lots of credit cards and significant debt, consolidate all debt and embark on a strict strategy to pay it down. Once you have cleared the debt you can re-explore your borrowing capacity.
- Understand and improve your credit score. Your credit score is a mathematical assessment of the data in your credit report. Your credit report contains a history of your credit related financial information over the past five years.
- Once you have reduced your outgoings each month this additional income can now be considered by lenders as available income that can be applied to your mortgage repayments. This can boost your borrowing power and take you one step closer to fulfilling your property dreams.
Let us help!
We can help you organise your finances including consolidating debt and working out your borrowing power. We can help you refinance or borrow for your first home. Contact us today to arrange a chat.