How To Increase Borrowing Capacity [To Offset Impacts of Rising Rates].

Are you planning to make the most of lower property prices and buy a home or investment property in the next 6 months?

If you’ve tracked your borrowing capacity recently, you’ll find that since the first RBA rate rise in May 2022, your borrowing capacity has shrunk by between 22% to 30% or more in some cases.

As each of the rate rises were announced, your borrowing capacity reduced.

What I am doing now, as a Mortgage Broker, is focusing on how to increase my clients’ borrowing capacity.

I am sharing today the Top 6 Strategies I use because I want you to be able to buy the best property you can afford.

You can also watch me on YouTube here.

 

What Has Triggered A Reduction In Borrowing Capacity?

Before we look at the Top 6 Tips let’s look at what has caused borrowing capacity to reduce.

Two things.

Rising interest rates is the main one.

And increasing costs of living will be the next factor in 2023.

In real terms, for some people we are seeing their borrowing capacity drop by between 22% to 30% or more.

So if you were able to borrow $1 million at the start of 2022, now the bank will only lend you somewhere between $700,000 to $780,000.

This is huge change for most people.

And it is part of the reason why we are seeing house prices reduce as buyers can’t borrow as much.

It’s interesting that through the peaks of COVID, the challenge buyers faced was getting their offer to buy a property accepted with so many other cashed up buyers around.

The cycle has definitely shifted and in today’s market we are seeing more properties sitting on the market for longer, with considerably less buyers around (read now’s probably a good time to buy an investment property)

 

 

 

How Do Banks Calculate Your Borrowing Capacity?

Broadly speaking banks look at your:

• Current debts and obligations
• Income
• Living expenses.

 

Top 6 Most Impactful Ways To Increase Your Borrowing Capacity.

Most clients have a combination of a fairly set income, some savings, and a couple of debts.

Here is a simplified view of what we may recommend:

• Use some deposit to pay down debts;
• Look at a different lender who will lend you more;
• Consolidate your debts to reduce repayments and keep your deposit as is.

It goes without saying really, that in no way am I encouraging people to borrow more than they can afford.

 

Current Debts And Obligations

Other debts really bring your borrowing capacity right down, so paying them down or off, is going to increase your borrowing power.

 

1- Personal Loans

Let’s look at personal loans first.

If you are currently repaying a personal loan of say $500 a month, this will reduce what you can borrow for property by about $155,000 – which is huge for most people.

 

 

 

2- HECS-HELP

HECS, the Higher Education Contribution Scheme, is another debt that has a big, material impact.

Most people don’t realize that a HECS debt effects what you can borrow.

If you are a single person earning say $100,000 a year, then having a HECS debt reduces your borrowing capacity by around $84,000.

If you have only a small HECS debt left of say $5,000, then we may pay that out.

 

 

 

3- Credit Cards

With credit cards, it’s actually the limit here that matters, not the balance.

Each $1 of limit reduces your borrowing capacity by about 6.4 times.

So for example, a $5,000 credit card limit will reduce your borrowing capacity by $32,000.

 

4- Salary Sacrifice

Salary sacrifice on cars has a huge negative effect on what you can borrow.

It’s because banks are including pre tax and post tax deductions as repayments.

I have a client who was paying around $1,500 a month on salary sacrifice for their car and their borrowing capacity was about $65,000 less than what they needed to buy their first investment property.

What I recommended for them was to refinance the salary sacrifice to a standard car loan where repayments were $880 a month.

This one move alone increased their borrowing capacity by $87,000.

 

 

 

5- Living Expenses 

Living expenses is another big one.

I recommend you reduce your living expenses for the 3 months prior to buying a property, to show you can budget.

There are also some living expenses that have a bigger impact on your borrowing capacity than others.

There may be ways to adjust these but they are typically more set than variable expenses.

 

6- Income

Moving now to income.

A pay rise of say $30,000 will increase your borrowing capacity by about $162,000.

Even a $5,000 pay rise helps, increasing your borrowing capacity by about $35,000.

 

So as you can see, despite the impact of rising interest rates, you can really do a lot of positive things to increase what you can borrow.

The exact strategy and items in your finances that we target are going to be different for each you, it’s really case by case.

As always, just book a free 15min call with me.

I recommend you do this now if you plan to buy property in the next few months.

 

My name is Victor Kalinowski and I’m a mortgage broker at Blackk Mortgage Brokers, and we help people buy property all over Australia. We can do this all via video calls or we have offices based in West End (Brisbane) and Burleigh Heads (Gold Coast).

 

The information contained on this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Copyright Blackk Mortgage Brokers 2023.