How to boost your borrowing power and get the home loan you need

Whether you’re looking to refinance or buy, these common mistakes could be killing your chances at getting a home loan – unless you follow these expert tips.

Rising interest rates have left the borrowing power of many Australians “in tatters” with the Melbourne Cup hike causing further pain.

Rate City research shows the borrowing capacity of a single person with no debts or dependants earning the average wage of $92,030 has fallen more than $200,000 in the last 18 months to $482,800 – even if they got a 4.5 per cent pay rise at the same time.

A family of four where one parent works full time and the other works part time at half the wage, has seen their maximum borrowing capacity drop by an estimated $278,100 to $600,300.

A string of interest rate hikes has put the borrowing power of many Aussies “through the shredder.”

“Most people’s borrowing power has been put through the shredder, leaving many people’s home buying plans in tatters,” Rate City research director Sally Tindall says.

But whether you are refinancing or looking to buy, there are a range of things you can do to boost your borrowing power.

CUT DOWN YOUR EXPENSES

It may be hard to control the cost of groceries and power, but the cost of discretionary spending is well within your control.

Louisa Sanghera from Zippy Financial says it’s important to be careful with your spending for at least three to six months before approaching a bank or mortgage broker.

“Banks are looking at every cup of coffee you buy, they’re looking at your Netflix – anything you basically spend is now accounted for,” she says.

RateCity Research Director Sally Tindall. Picture: Tim Hunter

Big transactions can pose quite a problem. Think twice before booking concert tickets for a large group of friends, or stocking up on alcohol in the lead up to Christmas as both will affect your borrowing capacity by jacking up your overall living expenses.

Ms Tindall says “giving your expenses a spring clean” a few months before you approach the banks can make a big difference.

“RateCity.com.au research shows if a borrower on the average wage cut down their monthly bills and expenses by 20 per cent, from $2,300 to $1,840, they could potentially increase the maximum amount they can borrow from the bank by over $50,000,” she says.

Credit cards are seen as a liability by banks.

CANCEL YOUR CREDIT CARDS

Ms Tindall says cancelling an unneeded credit card is one of the easiest ways to boost borrowing power. Banks take into account your credit card limit as a liability rather than the actual amount you spend on it each month.

“A credit card with a $10,000 credit limit could reduce your borrowing capacity by an estimated $41,400, even if you don’t owe a single dollar on it,” Ms Tindall says. “A $20,000 credit card limit has the ability to reduce your borrowing power by $85,700.”

Don’t go crazy with your Christmas shopping. Picture: Richard Dobson

PAY BACK YOUR HECS DEBT

While it’s best to speak with a broker before doing so, it’s worth noting that your HECS debt could stand in the way of borrowing the amount you need for your next home, says Loan Market Geelong’s Sarah Thomson.

A single borrower earning $70,000 a year could have their borrowing capacity drop by $20,000 to $30,000 if they have a HECS debt – even if they only have a few grand owning.

Banks don’t tend to look at the size of the HECS debt, but calculate a yearly expense for it based on your income.

Being budget savvy can help you secure a loan. Picture: Richard Dobson

“The higher the income, the more potentially beneficial it can be to pay off that HECS debt,” Ms Thomson says. “If you earn $120,000 the banks take into account that you are paying about $10,000 a year in ongoing debt.”

Those earning $120,000 a year could reduce their borrowing capacity by about $100,000 just by having a HECS debt as small as $3000.

A longer loan term could equate to better borrowing power.

APPLY FOR A LONGER LOAN TERM

Another way you can boost your borrowing power is to apply for longer home loan terms rather than shorter ones, says Daniel O’Brien from PFS Financial.

“The lower your contracted repayments are, the more you can borrow,” he says.

“You can always tweak the repayments after you settle to be based on a shorter term.”

Another advantage is that it gives you greater flexibility should you fall on tough times.

“Being that the contracted term is 30 years, if they’re ever struggling with that higher 20 year repayment, they can always go back to the 30,” he says.

Originally published as How to boost your borrowing power and get the home loan you need