Many people ask me “How can I increase my borrowing power?” Since lenders have become less lenient of recent increasing your borrowing power using these simple techniques could mean the difference between you buying that property you dreamed of or missing out on it due to insufficient funds.
In today’s market knowing how bank’s assess your lending criteria, and thus how to be able to borrow as much as possible, is extremely important. These little tips and tricks may just help you get approved for a larger loan than you ever thought possible.
Increasing your borrowing power can allow you to leverage more and invest in more property faster. This means you can take advantage of more potential profit from your properties.
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Here are my twelve techniques to quickly and easily increase your borrowing power. I’m not going to waste anytime I’m going to get straight into it:
1. Minimise your available credit
If you have credit cards this can work against your borrowing power.
Let’s say you have three credit cards and they all have ten thousand dollar limits on them. You’re not actually using them, you just got these limits saved up for a rainy day.
These limits can actually lower you’re borrowing power with the Banks. The reason for that is the Banks look at that as debt. Remember even if you have a zero dollars on your credit card the Banks are signing you up for maybe twenty five, maybe even longer. They’re looking at that credit card and saying in five years or in twenty years time this person could effectively have a ten thousand dollar credit card debt.
Looking at minimum repayments on credit cards, of maybe three percent, they might say this person is going to have to pay three hundred dollars a month to the credit card company for every ten thousand dollars of debt them have on a credit card. So if I was a bank I’m going to protect myself and I’m going to take away three hundred dollars per month from the service ability and give them a smaller loan.
So, if you have excess credit cards that you don’t need lower the amounts on them or get rid of them altogether.
2. Claim all your income throughout the year (even cash payments)
Now there are obvious benefits, not legal benefits, to not claiming all your income. We all know some people do this, I’m not endorsing this at all, but some people don’t claim all of their income because you don’t have to pay tax on income that you don’t claim.
Now this can severely hurt you when it comes time to borrow from the bank and it will limit your borrowing power. By claiming all of your income you’re showing the Banks everything you earned for that year.
Banks don’t just look at your last two pay slips, they will look at your last two tax returns. They will look at the last two years and how much you earned, so the more money you claim the better off you are. Yes you have to pay tax on that, but the bank will actually look at that and see that as a more stable income and then increase your borrowing power for you.
3. Have your tax returns up to date
By having it up to date you allow the Banks to look at your past records and see your income and see you’re stable see a steady income and this can help to increase your borrowing pal
4. Split liabilities and debts with your partner
f you’re just going for the loan yourself and your spouse isn’t going to be on the mortgage, then it can actually work in your favor to split your liabilities with them. Instead of you assuming all the expenses, such as cost of living, if you split them between the two of you then the Banks are going to say that you are able to service a much higher loan than if you had to pay for all those expenses yourself.
There are certain rules around this so always speak to a taxation accountant before you make any claims or anything like that.
5. Choose a lender that will count the rental income
Now not all lenders or Banks will count the rental income from an investment property. Some Banks don’t count any of it, some Banks might take into account maybe 3-4% of the purchase price as rental income. Then some lenders will take eighty percent of the annual rental income that you’re expecting to receive.
Now obviously the more rental income they take into account as income you can use to pay off your loan then the higher you’re borrowing power is going to be.
6. Choose a lender who favours your type of income
There are lots of different types of income. You might earn income from a nine to five job, you might be a contractor, you might be a consultant, you might be a sole trader or small business, you might have a company. Choose a loan that favours your type of income otherwise they’re not going to give you as much borrowing power.
7. Shop around to minimise your interest rate
Different lenders offer different interest rates so go to a mortgage broker and shop around for better interest right.
If you can save one percent on your annual interest rate you can free up a lot of money. This extra money can be used to pay for the loan.
If you have $100,000 mortgage saving 1% p.a. that is a $1,000 saving per year, if you have a $300,000 mortgage that’s $3,000. That’s three thousand dollars a year that you don’t have to pay that can be added to your serviceability. So shopping around to get a good interest rate can help you out.
8. Choose the right loan product
You wouldn’t think it but different products within a bank or within a lender can actually give you a different borrowing power.
There are different types of online products, there are ones with honeymoon period with a low interest rate for the first year. There are loans where you get an offset account, There are many different types of loans and each different type of loan will assess you differently, so choose the line that will give you the highest borrowing power.
One of the best ways to find this out is to ask your lender about your boring power for the different loans or to speak to your mortgage broker.
9. Move all your debts into your mortgage
The reason this works is if you have a credit card debt maybe ten thousand dollars and you’re paying twenty percent interest on that and you roll that into movies that’s five percent interest when you’re saving fifteen percent interest per you your outgoing payments comes down and therefore you service ability goes up and the potential for high ballroom power goes up also
10. Use your other properties as collateral also
If you have other properties then you can use them as collateral for the new investment property. Banks love this because it means if you go belly up on your investment property they can effectively use your house or your other investments as security to make sure they get the money back.
This technique can help you increase your borrowing power, but just be careful because if the market changes against you the banks may force you to sell of a property of divert funds onto your loans.
11. Go interest only or have a longer term loan
The reason this works is again improving your serviceability. With interest only loans the Banks are just looking at whether you can pay the interest on a monthly basis (rather than the principal and interest). The monthly repayments of the loan will be lower (than a P&I loan) so your boring power could be higher.
Again if you extend the loan from twenty years to thirty years, you’ll be paying less principal of the loan each month and therefore your monthly repayments will be lower.
12. Save a larger deposit (not so quick)
I know this isn’t quick, but it can be very helpful in increasing your borrowing power. If you only have a 5% deposit you’re going to have to pay lender’s mortgage insurance, and you’re buying power maybe limited because of that small deposit.
If you have a 20% deposit that puts you in a really good position. Most banks won’t charge you lender’s mortgage insurance if you have a 20% deposit. If you go even further and have a thirty or forty or fifty percent deposit then you can even go as far as get low doc loan with the bank and all sorts of things – so saving a large deposit can really help you.
So there’s twelve techniques to quickly and easily increase your borrowing power in today’s market. I think they’re extremely important tips and I hope that these have helped you.