Is now a buyer’s market? And if so, is it a good time to be a first home buyer or an investor and is borrowing money easy? All questions that are getting thrown around and it’s hard to know for sure what the answer is. I’m seeing a huge amount of enquiry from people looking to buy property and that’s across the board for both First Home buyers and Investors. The one thing all of these buyers have in common is that they need to borrow money in order to buy - obviously or they wouldn’t be talking to me….
When it comes to borrowing money, it can be so easy just to throw an application together and go into a bank hoping for the best without really thinking about things. The reality is though, that despite everyone’s situation being a bit different, there are some common things we can all do to help maximize our borrowing potential or our ‘serviceability’.
For standard residential lending, the banks use a pretty basic servicing calculator that works out how much you can afford to borrow. These calculators differ slightly across banks depending on the respective servicing rates (currently between 6% and 7%) but for the most part are pretty similar. Basically, it’s income less expenses and that gives you a surplus that can be used to meet your new loan commitments. The bigger the surplus, the bigger the loan you can borrow. So, to get a bigger approval, you either need to increase one (income) or decrease the other (expenses).
Increasing income is probably the harder of the two, so let’s focus on how you can reduce your expenses. There are some small things that you can do to swing that calculation in your favor and you might be surprised at the difference it can make:
Reduce credit card limits
Whatever your credit card limit is the bank will take 3% of the limit and use that as the monthly expense. This means if you have a credit card with a limit of $20,000 then the bank will include $600 per month in your expenses. That’s $7200 per year which could decrease your borrowing potential by almost $100,000. Now, you might say ‘but I need a credit card for airports’ and that’s fair enough – so do I – but you probably don’t need that whole limit. If all you did was reduce that limit down to $10,000 then that would give you an extra $50,000 borrowing potential. A small change for a big gain.
Payoff your student loan
This one isn’t always possible, and it comes down to your priorities because it can be a tough pill to swallow when your deciding whether to pay off an interest free loan or not. However, that interest free loan comes with a fixed commitment that comes straight out of your pay whether you want it to or not. That commitment is 12% of every dollar you earn over $20,020 per year. This means if you earn $60,000 then your monthly student loan commitment is $400. That fixed commitment reduces your loan that you can afford by around $65,000.
Close those store cards
I know, they’re interest free and for the most part relatively small but they’re a pain when it comes to borrowing money. Again, same at the credit card, the bank takes a percentage of your card limit (not just the amount you owe) and use that as your fixed monthly commitment. These are really common, mostly because they’re so easy to get but they also tend to build up over time as you need new furniture or a bed, and then that bigger TV becomes a must have! The problem is, despite them being interest free, they show the bank that rather than saving, you need to take on debt in order to buy something. So aside from the impact it has on how much you can borrow, it just looks average. So, pay it off if you can.
Consolidate any consumer debts into one
To be honest, if you need to consolidate numerous debts into one then it’s probably worth paying that down before approaching the bank. However, often what can happen is that you end up with multiple small facilities such as the ones listed above. These will all be at different interest rates (often a lot higher than you realize) and over different terms. Having multiple direct debits go out on different days is a nightmare and more often than not leads to going into OD on your account or missing payments. So, consolidate them all into one. This will not only help you manage your money but if done right, it will reduce your monthly payments which will in turn increase your borrowing potential.
Get a boarder flat mate
Not all banks will take into account this additional income, however, it can be a fantastic way to increase your income and therefore your borrowing potential. Most banks will allow for at least $150 per week (assuming the house is big enough) which again will add about $100,000 to how much you can borrow. If you’re starting out as a first home buyer, then chances are you’ve already been flatting so having someone else there won’t change anything. It’s even better that they’ll be helping pay off your mortgage rather than someone else’s!
Small point on this one is that I wouldn’t really recommend that you leverage boarder income to borrow more money. Chances are you’ll get sick of having a flat mate and you don’t want to find yourself in a position where you have to have one in order to afford the debt. So, whilst this is a great option, think about where you’re at in life!
Individually these changes may seem small but as you can see, they can make a big difference and if you’re a first home buyer they could be the difference between getting a house or not.