Before searching for your new home, it's wise to have a clear idea of your borrowing capacity. This is the amount the bank is prepared to lend you based on your individual situation and will generally vary from lender to lender.
Each bank has their own lending guidelines which serve to prevent people from borrowing more than they can afford. These tips may help to increase your borrowing capacity before applying for a loan.
1. Reduce credit card limits
Credit card limits can affect your borrowing power - even if you have no money owing on your credit card.
Lenders know that the credit card holder has the ability to spend that money. They will calculate your borrowing capacity based on how much you will need to repay if you were to max out your credit card.
It's important to the lender that you can still repay your home loan without being under financial pressure.
Tips to reduce credit card debt ›
2. Include additional income
Lenders will often accept a range of additional incomes so make sure to provide information for all types of income that you receive.
Additional incomes may include: Dividends, second jobs, child maintenance payments, Government benefits, bonuses, commissions, annuities and rental income from an investment property.
3. Connect with a Mortgage Broker
Many home buyers will go directly to their bank to calculate their borrowing capacity however, your borrowing capacity can vary from one bank to another.
A mortgage broker is a qualified lending specialist with access to a wide range of banks and lenders. Your broker can suggest potential lenders and loan products that may be suited for your needs and home purchase goals.
Using a mortgage broker can also save you from making multiple enquiries and loan applications with different lenders - which may impact your credit score.
4. Reduce debts
Lenders will take into account your current financial commitments. Unsecured debts like credit cards and personal loans are very expensive and reduce the amount you can repay on a mortgage. Reducing or paying out these debts can increase your borrowing capacity.
5. Have a good credit history
When looking to buy a home, having a good credit report is extremely important. Why? Because when banks offer you a home loan, they're essentially betting that you'll be able to pay it back.
If your credit history shows late payments or defaults, they may decline your home loan application.
Having a good credit history with bills paid on time will show the lender that you're a responsible borrower and can increase your borrowing capacity and chance of approval considerably.
Learn how to improve a credit report ›
6. Consider a joint purchase
If your borrowing capacity isn't high enough and you're struggling to meet the lenders income requirements, then you may want to consider the idea of a joint purchase with someone else.
Joint purchases are a popular way for many to get into the property market. By teaming up with a partner, family member or friend you may be able to add additional income and increase your borrowing capacity!
Online pre-qualifier
We can provide you with a free assessment to find out your potential borrowing capacity based on your current situation.
