22 June 2017
‘How much can I borrow?’ was Google’s most popular home loan question in the past 12 months.
Home loan lender ME did the analysis, which shows Australians made the inquiry more than 25,000 times, highlighting the dilemma housing affordability is causing many buyers.
ME’s Head of Home Loans, Patrick Nolan, said knowing your limit is particularly important for first home buyers both in terms of maximising buying power but also ensuring you don’t overextend.
“First home buyers are new to home buying and home loans and want to find their ‘sweet spot’ – a borrowing amount that fits their lifestyle but also maximises their buying potential.
Nolan says that when it comes to maximising buying power, a deposit is important, but isn’t everything.
“A range of factors work together to shape your borrowing power,” he said.
“Lenders look at your monthly living expenses, number of dependents, the limit on your credit card (not just how much you’ve racked up in card debt), outstanding loans and your income.
“Banks treat unreliable income sources such as bonuses or commissions differently to base incomes, and consider permanent or full–time jobs more favourably.
“How you intend to repay also affects your borrowing power. For instance if you choose interest-only loan repayments versus principal and interest loan repayments.”
Boost your borrowing power
Nolan recommends the following to boost your borrowing power.
1. Comb through your household expenses. Lenders look closely at your living costs and don’t just use industry benchmarks, so be prepared to show you have household costs under control. Consider areas where you could cut back to free up income.
2. Consider crimping your credit card limit. Lenders put more importance on the limit of your credit card rather than the outstanding balance because the limit is what you could potentially find yourself owing. Contact your card issuer to get the limit reduced.
3. Pay down other debts. If there’s money owing on a car loan or personal loan pay it down to boost your borrowing limit. Lenders like to know you can comfortably handle all your financial commitments and if you have a clean slate your loan application is more likely to get a ‘thumbs up’.
Nolan also warned that calculators, while useful are indicative only.
“To confirm how much you can borrow speak to a home loan expert and always get pre-approval before so you have a guaranteed borrowing limit - otherwise you could be left in the lurch come auction day.”