There’s no point looking at dream homes if you don’t know what your budget is … or is there?
“One of the most important factors buyers need to consider is how much they can borrow,” explains Andrew Crossley, property investment strategist and founder of Australian Property Advisory Group. “If the borrower is unaware of what is achievable for them, the best intended goals, hopes and dreams can be undone.”
So how do you find your sweet budget spot? And just as importantly, how do you max your borrowing capacity?
Andrew says there’s 7 simple steps. “Implement these and you will improve not only your chances of obtaining finance, but increase the amount you can borrow, too.”
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1. Reduce the number of credit cards and limits on the cards you have.
“For every $1000 that you remove from your credit card limit, you can increase your borrowing capacity by up to $5500, depending on the lender.”
2. Use a broker
Leave the number crunching to the pro’s. “Don’t shop around for the best rate as it could inadvertently end up with several credit enquiries on your credit report,” warns Andrew. “Every time you apply for a credit card, personal loan, or interest free finance for furniture at a retail store, a credit hit appears on your credit record. The more credit hits you have the more of a risk you become to a lender.”
Andrew says using a broker can help you use the best borrowing capacity calculator for your circumstances. “Different types of income are treated differently, and can make or break a deal. The borrowing capacity of the borrower can differ by tens of thousands of dollars, depending on which lender you go to.”
3. Go easy on the tax claims
Hmmm, should you minimise your taxable income at tax time (and therefore what you pay the government? Or cough up, and look more cashed up on paper?
“Keep your paperwork up to date, especially if you are self-employed. It can make a huge difference in your rate and borrowing power when tax returns and assessment notices can be supplied to the lender,” warns Andrew. “Self-employed borrowers do sometimes prefer to avoid tax, rather than to increase their taxable income on paper. If the taxable income was able to be increased on paper, it could aid in increasing the borrowing capacity.”
4. Don’t go guarantor
They say don’t mix family with business for good reason – it’ll cost you!
“Never be a guarantor for family or friend on their loan, most lenders will consider you to be jointly and severally liable for the entire debt, yet, you have put yourself into a position of receiving absolutely no finance benefit,” warns Andrew. “Of course, emotional benefit can outweigh financial benefit, just be aware you must be prepared to compromise on your borrowing capacity, and in turn your opportunities for a better financial future.”
5. When investing, diversify the properties you purchase.
Already have property investments? Good for you! Just make sure your bricks and mortar are, errr, different variations of bricks and mortar. “If you only purchase capital growth focused properties, the yield will be lower and you more quickly reduce your borrowing capacity,” says Andrew. “Consider having some higher cash flow properties in your portfolio in order to more positively impact on your borrowing capacity.”
6. If you are investing, consider the ‘individual’ versus ‘trust’ or ‘company’ position carefully
“Whilst purchasing in a trust or company is good for some, it does negatively impact on your borrowing capacity when there is no income being earned, other than rental income, in that entity,” Andrew explains. “For example, if you have a job or have a separate ABN through which you operate from, you will not be entitled to use any tax deductions that could ordinarily be claimed from the property against your income. Many lenders can factor in deductable interest in their borrowing capacity calculators, without this being factored in, your borrowing capacity will be lower. Also worth noting is that interest on a loan used for the purpose of purchasing an investment property is typically tax deductible.”
And we like the sounds of that…!
7. Limit your wine, movies and European holidays
Hate to break it to you, but those Jimmy Choos and Ski lodge weekenders won’t impress the bank manager.
“Living expenses can play havoc with your borrowing capacity, most lenders have increased the amount of living expenses attributable to each person on the loan, and those in the household/s of the borrowers,” Andrew explains. “Lenders are also asking borrowers to itemise their expenses. The more you spend, the less you will be able to borrow. Borrowers previously could more easily understate their living expenses and often get away with it, but now lenders are clamping down on this and separating basic expenses from discretionary ones, the more discretionary expenses you have, the less you can borrow.”
For example:
- Basic living expenses (e.g. rates, utilities, repairs, food, transport, fuel, parking, clothing and personal care, cosmetics, rental costs/board.
- Additional living expenses (e.g. investment property utilities, insurances, mobile phone, internet, newspaper and magazine subscriptions, dental and medical, private school fees, children’s activities, childcare, child support/ maintenance, recreation, entertainment, memberships, restaurants, holidays)
So, keep your expenses lower if possible, especially any additional expenses.
“By considering these simple tips, you can positively contribute to increasing your borrowing capacity,” Andrew says. “You could increase the choices you have in life, whether it be where you live, what you can buy to live in, whether you can invest, and the number of investment properties you could obtain finance for.”
ABOUT: Andrew Crossley is a property investment strategist and founder of Australian Property Advisory Group. He is also the author of the #1 best-selling books. The 100k Property Plan, Commercial Property and Residential Development Made Simple (Busybird Publishing, $24.95 and $15.95 respectively). For more info’ visit www.australianpropertyadvisorygroup.com.au
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