There’s no quick fix as to how to increase your borrowing capacity, but there are some surefire steps that can definitely help.
Regardless of your savings when you’re looking to buy a home, the amount of money you’re able to borrow is determined when a lender calculates your borrowing capacity.
You may have already calculated your borrowing capacity before approaching a lender and found that you haven’t yet hit the figure you were hoping for. So, this begs the question: “How exactly do I increase my borrowing capacity?”
The following are some basic ways to increase your borrowing capacity and get you into your first house sooner rather than later.
Whether you’re a single or a couple about to tackle the property market, increasing your gross income is the first, albeit obvious way to add some shine to your application.
If you’ve been in the same employment for a while, it may be time for you to negotiate a pay rise. “Easier said than done,” is what you may scoff back. And that’s reasonable, but often in our jobs we step up and take on additional duties that aren’t represented in our job descriptions, and aren’t commensurate with our wage. By examining what you do at work, you may find there are some gold nuggets you previously overlooked that can be used as bargaining chips.
Short of feeling like you’re trying to extort money from your primary employer, you could also take on extra hours at your job (if they’re available), or moonlight for a period in a second job. It’s understandable that working a second job is a huge undertaking and the increased tax rate on this second job may hardly seem worth it. Remember though that the bank looks at this income before tax, so regardless of your take-home pay, you will increase your gross income and hopefully reap the rewards — not only in the eyes of your lender, but also at tax time.
Once you’ve gone through the first round of examining your borrowing capacity, you’ve hopefully got a good grasp on where your money is going on a day-to-day basis. With daily necessities like coffee now a staggering $8 in many cafés, there are parts of our household budget where we can all trim a little fat. Calm down, this is by no means a suggestion that you deny yourself coffee, but simple moves like meal planning and batch cooking will reduce your spend on lunches out and takeaway deliveries. These are not only an excellent money savers but also often better choices for your health and for the environment.
Buying second hand is a great money saver and a more sustainable solution if you need ‘new’ stuff. From publications back in the day like the Trading Post, to Ebay, Gumtree, and Facebook Marketplace, you can literally get anything you need second hand (sometimes even free!) and in excellent condition, minus the packaging and the expense. It’s a way better option than a trip to Ikea (remember you are allowed to just go for the meatballs and not buy any furniture!).
Everyone is working tirelessly to stay afloat with the increased cost of living and, ironically, retail therapy seems to be a ‘go to’ for many as a way of justifying the amount we work and then spend on things we deem we ‘need,’ nay, deserve. Shifting your perceptions about your real daily requirements can be very helpful to the bottom line of your borrowing capacity.
Another surefire way to reduce unnecessary expenses is by reviewing your utility bills. You’d be surprised what a few phone calls can achieve in lowering your basic utility charges — you may even find discounts are available for customers who pay on time. Make sure you’re only paying for what you need and use and if your provider doesn’t want to come to the party, you can always take the party elsewhere.
While we’re doing some paperwork, managing your subscriptions and memberships can definitely reduce expenses. Even when we think we’ve been diligently cancelling subscriptions after free trial periods, there may be monthly charges we’re unaware of. Worse still are the recurring subscriptions that have a one-off yearly charge you may have forgotten about. Last thing you want to do is overdraw your account and pay for that as well! A few hours spent with a fine-toothed comb and a bank statement can really pay off.
When you add it all up, how much debt are you in before you’ve even got a mortgage? If you’re in over your head, debts can be easier to manage by consolidating them under one loan. Sometimes lenders offer cashback incentives for you to do just that. Always be aware of the smoke and mirrors of ‘cashback’ offers though — they’re often masking high variable interest rates and other ‘loan terms’ that may not work to your advantage, so be sure to do your research and shop around.
You could also potentially ask for some help from parents or family. Unlike The Bank of Mum and Dad or a Guarantor Home Loan, you could ask someone to pay out a smaller debt for you and work out your own terms with them off the record. The pros and cons of involving family often lean more heavily on the con side but it’s worth mentioning and is definitely an easier conversation than asking your parents to put their house on the line for you.
Not everybody understands that large credit limits are detrimental. While you may never actually take a full bite into them, the way they’re understood by lenders is that you are, upon approval, in debt for the full credit amount. Shocking isn’t it?
By reducing your credit limits or HECS, as much as you dare, you’ll be helping the bottom line of your borrowing capacity hugely for ultimately very little effort. It could even be time to close out a card, personal loan, or overdraft facility altogether.
Part of managing your money successfully is being honest with yourself. If you can’t afford to buy something (non-essential), it’s time to start saying no to yourself. Having a roof over your head that you own is definitely a great incentive to more often work the word “no” into your financial dialogue with yourself.
