Before going ahead with a home loan application, it’s crucial to assess how much you can borrow and also what you can realistically afford in repayments. Understanding what impacts your borrowing capacity can help you prepare for your first meeting.

Three key factors affecting your borrowing capacity are:

Your credit history and credit score

Ensuring you have a clean credit file will give you the luxury to qualify with all lenders. This helps you maximise your borrowing capacity as each lender applies different assessment rates – which ultimately can help you purchase the property you want. If you have a blemish on your credit record, such as an unpaid phone bill this can reduce your maximum loan to value ratio to 80%, depending on the severity of the default and if this has been paid.

Tip: pay for a thorough Credit Report which will give you an insight into your actual Credit Score and also tell you how many applications for finance have been recorded. You may be surprised about some credit cards which you think you didn’t apply for that show up!

Credit Cards

Banks will take an annual liability of 30% on your credit limit. For example, if your credit card limit is $20,000 the Banks will assume an annual liability of $6,000 annually. This has effectively wiped $6,000 from your annual income. In addition, if you are applying for a Package Loan – the Bank will also include the credit card issued as part of your package, which is another $5,000 limit as a minimum. This will restrict your borrowing capacity with the increased liabilities and debunks the myth that having credit cards helps with your credit worthiness.

Tip: consider closing off credit cards you do not need and reduce the limits on your existing credit cards before you apply for your loan. It’s also a good time to review your credit cards and save on annual fees. Contacting your credit card providers and ask to have your annual fee waived or your will close your credit card (works 99% of the time – the other 1% is the case of no fee credit cards!).

Salary sacrificed motor vehicles/ Leasing

I’m sure your accountant has suggested a salary sacrificed motor vehicle is a great way to lower your taxable income. However, when you apply for a loan the Bank will factor in your Pre & Post Tax contributions and take these as deductions. While you may have saved on tax, you have also taken quite a hit in your borrowing capacity.

Tip: before applying for your loan, find out the estimated payout figure and penalties would be if you paid out your lease early. This could help you maximise your borrowing and help you buy the home you want. If you really want to lease a vehicle, we can recommend lenders who offer home owners much better interest rates and we can organise this after your loan has settled.

There are certainly positive ways to increase your borrowing capacity, such as:

  • Bonuses
  • Commissions
  • Allowances
  • Overtime

Each lender will look at these on a case by case basis depending on the consistency of these payments and it’s always helpful to mention if you are entitled to any of additional income sources to boost your borrowing capacity.

Lenders care about their brand and reputation but they also have a duty to lend responsibly, which is why they ask for full disclosure and evidence on any ongoing financial commitments you have. This will provide an insight into your account conduct to ensure you have not missed any repayments.

At Atelier Wealth we are passionate about empowering the next generation of Australian’s on the hunt for financial success. Get in touch for a complimentary consultation and start to understand your borrowing capacity – this could mean you’re closer than you thought to being ready to buy – or, we can help you with a plan to get there sooner.