8 Tips to Increase Your Borrowing Power to Get a Home Loan
Owning a home is a dream for some but with the increased cost of living it feels almost impossible for many Australians now.
To help, we are doing a series with experts covering everything you need to buy a home.
Our Money Experts
Here are four money experts we discussed increasing your borrowing power. Each has a different background and are a wealth of knowledge.
If you have further questions on anything anyone says or want help with a loan, you can contact them below.
Please remember this article is general in nature and you need to seek professional advice specific to your circ*mstances.
Kylie Travers, owner of The Thrifty Issue (this site!) offers some personal experience throughout the article.
Ben Baume, Co-Founder & Chief Product Officer at Craggle. Craggle is a mediator helping Australian mortgage holders negotiate home loan rates with a customer’s existing bank, or a new one, leveraging the power of crowd-based negotiations.
Rachel Wastell, Mozo Money Expert. Mozo is a bunch of financial revolutionaries, here to help you make smarter money decisions. A trailblazer in financial comparison, we’ve been providing Australians with practical money tips and expert analysis, challenging the norms and creating award-winning tools to help you master your financial journey since 2008.
Taryn Pontifex, Chief Operating Officer at MOVE Bank. Taryn has worked in the finance industry for nearly 15 years. Working across banking, mortgages and settlements, Taryn is an expert in all things lending. As an experienced credit professional, Taryn is accustomed to assessing loans to achieve the best outcomes for clients. Taryn brings a wealth of experience from the mutual banking sector, which exists to benefit members, instead of shareholders.
Harrison Astbury, InfoChoice money analyst. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.
How to Increase Your Borrowing Power
Many factors contribute to your borrowing power when it comes to getting a mortgage.
The tips below can help with any loan and your finances in general but the wording will be about home loans or a mortgage.
1. Sort Your Debt
Any other debt you have will have a significant impact on your borrowing power.
Look at all the debt you have then consider how you can pay it off, reduce it or reduce the limits to help increase your chances of getting the mortgage you want.
For tips to reduce your debt, read these 6 tips to easily reduce your debt which include tips for dealing with debt collectors too.
Credit Cards
Almost every home has one and while you might not think much of it, your bank or lender will.
Pay off your credit card if you can, consider getting rid of it or reducing the limit.
Even if you have nothing owing on your card, the entire limit is counted when it comes to banks looking at your borrowing power.
HECS
“Consider wiping out your HECS/HELP debt, especially if it’s a modest balance. More banks are factoring this into borrowing capacity, and you’ll also avoid indexation and potentially bolster your tax refund after June 30. I did this last year, paying off about $16k and saving around $1000 in indexation.” Says Harrison from InfoChoice.
AfterPay, Zippay, ZipMoney etc.
Many Aussies don’t think about the ‘buy now, pay it later’ options as debt but they all contribute to your expenses and therefore your borrowing capacity.
“BNPL accounts can significantly impact your borrowing capacity. When you apply for a loan, we will look at the total amount of combined debt you COULD owe, so if you have 3 credit cards, all with limits of $5000 each, we have to assume that at any time you COULD have to make repayments on $15000 of credit card debt. If you have credit cards that you don’t use, close them.” says Taryn Pontifex, CEO of Move Bank.
Any Other Loans
Personal loans, car loans, payday loans, and even loans from friends and family can all count towards your overall debt.
All payments you have to make reduce how much you can afford to pay off if you get a home loan.
While you might think the loan you got from a family member doesn’t count because it doesn’t have a contract or is a private arrangement, it is still a debt.
2. Review Your Finances
I recommend reviewing your finances at least annually anyway but if you are planning on applying for a home loan in the future, do one now.
Check out how I do my annual financial review and see how much you can save.
Go over every area of your budget and look for ways you can cut back.
Anything you can cut now such as takeaway, subscriptions you don’t need, random junk food when you fill up your car etc needs to go.
Doing everything you can to save money, e.g. these 24 ideas to save money easily in 2024, will help your savings and borrowing power.
Ben Baume from Craggle says, “Have a lifestyle expense that you will be cutting out once you have a mortgage? Cut it now. Under responsible lending, the bank needs to ensure you can make your repayments without impacting your regular outgoing expenses. While you can argue that you would not be eating out at restaurants every night for dinner once you have a home loan, it works in your favour if you can evidence it by giving it up before applying for a home loan.”
3. Check Your Credit Score and Credit History
When you apply for a loan or any form of financial credit, it goes on your credit history and contributes to your credit score.
According to Rachel Wastell of Mozo, “First, check your credit report annually from agencies like Illion, Equifax, or Experian, and if you see any errors – address them.
There is no harm in reaching out to rectify mistakes, as these errors could impact your ability to get approved for a loan.
Also, make sure you pay bills, rent, and any existing loan repayments on time to avoid missed payments (defaults) and boost your creditworthiness.
Limiting your credit applications is also a wise move because every application temporarily lowers your score.
If you are going to apply for a loan, choose the type of credit you apply for wisely, and only apply for what you can genuinely repay.
Building a savings buffer to show your financial stability can also help to improve your credit risk profile.”
4. Improve Your Credit Score and Credit History
Simple steps you can take to improve your credit score and history include paying your bills on time, clearing debts and keeping on top of all payments.
Did you know, that every Australian is entitled to free credit checks? These are a great way to know the specific details of your credit history.
You have a right to get a copy of your credit report for free every 3 months
Keep on top of your finances so when the time comes, you are ready because you know you have a clean history and a great score.
A credit score above 800 is considered excellent and provides you with better loan options.
Taryn Pontifex has great advice about improving your credit score and credit history.
“Improving your credit score is a gradual process that involves responsible financial habits and consistent effort. To assist with this, you can (a) check your credit report regularly and dispute any discrepancies you find (b) pay your bills on time, set up reminders or automatic payments to ensure you don’t miss the due date (c) don’t apply for credit you don’t need or apply with numerous banks for the same loan. Large numbers of credit enquiries will reduce your overall credit score (d) if you have a credit impairment such as a default, repay the debt. This won’t be removed from your credit report, but it contributes to the bank’s assessment of your character.”
That might seem like a lot you need to know and do but if you follow it step by step and know that it will take time, it will improve without feeling like you have to work for it.
For those who are new to being adults, new to the country or new to building a credit history, there’s help.
“If you don’t have much of a ‘history’ – don’t worry, comprehensive credit reporting changes in 2014 largely mean a bank would rather see a thin file than a lengthy but patchy one,” says Harrison Astbury.
5. Improve Your Savings and Savings History
Demonstrating you can save and have saved a deposit is important.
With as little as 3 to 6 months of history showing you’ve been saving something from your pay, you have proof of savings.
Aiming for 20% or more of your after-tax income is ideal, although it might seem difficult at this point.
Read 24 ways to easily save in 2024, how to get discounts on everything and these frugal habits to save thousands.
Also, consider a savings challenge to get you started.
6. Know What They Require
Lenders have general rules they abide by but there can be small variances in their requirements that can make it easier to apply with one over another.
“Boost your loan approval chances by checking the lender criteria before you apply, and don’t apply for more than you can afford.” Says Rachel Watsell.
However, if you don’t want to do all the legwork yourself, get a broker.
A broker is bound by Best Interest Duty to ensure you get the right loan and they only get once your loan settles.
But how do you know which broker to go for?
Research them, ask for referrals then check a few factors.
Ben Baume recommends looking for the number of banks they are able to write loans for.
“Not all banks are the same, they have different policies when it comes to lending such as; risk appetite, non-salary income they are willing to accept etc. and so where you may not meet the lending standards of 1 bank, you may meet them for another.
A broker can help you navigate this, and they are bound by a Best Interest Duty to do so however, they can only recommend loans that they are authorised to write against so ensure your broker has some decent optionality across the different banks to give you the best chance for success.”
7. Be Honest!
Don’t try to fudge the numbers and act as if you have a higher income or lower debt or expenses than you truly have.
For starters, most lenders use specific criteria and more are now using AI to detect fraud.
Also, if you borrow more than you can repay or lie to be able to borrow more, you run the risk of losing your home.
Be honest with everything about your expenses, your borrowing capacity, changes in the future that will impact your income etc.
This will help prevent you from borrowing more than you can afford and help secure a loan.
8. Increase Your Income
How much you can borrow comes down to all of the above factors and how much you can afford to borrow.
Your income is key here and if you are planning to borrow money, increasing your income now will help.
Firstly, if you are applying for an investment property instead of a principal place of residence, you have more options.
“Did you know you can include your potential rental income in your mortgage application? You will need a letter from a Real Estate agent validating what the weekly rent would be to satisfy the banks,” says Ben Baume from Craggle.
If you are looking to borrow for a home to live in and need to increase your income, you need to consider other options.
Read how to double your income for ideas on what you can do to increase it.
Salary income is the preferred income so depending on how long you have until you will be applying, securing a higher-paying job can help.
Only do this if you are staying in the same industry or not borrowing for 6 months or more.
Lenders want stability so if you’re changing jobs or careers, they might want to see you’ve been doing it for longer than 6 months before they will lend to you.
Side hustles can help you save but might not count towards your overall borrowing power. Check out 24 ways to easily make extra money in 2024 for some ideas.
Owning your own home can be exciting, be smart about how you borrow and your borrowing power to ensure you get to enjoy it for years to come.
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