By Guest Blogger, Daniel Pym, Director,
Loan Market, Double Bay | Erskineville | Castle Hill
The first thing is living expenses- all banks now require clients to itemise their living expenses and banks pay particular attention to things like discretionary expenses such as holidays and entertainment/dinners or gambling etc.
It can often be a good thing to curb those expenses in the months leading up to a loan application, to present your circumstances in the best light.
Everyone’s circumstances are different; however, we do see common things that we know if we address, we can increase clients borrowing capacities.
For first home buyers, typically the biggest thing is HECS debt/student loans, as anyone with a HECS debt will tell you, the more you earn, the higher the repayment, which reduces your borrowing capacity.
First home buyers are some of the most disadvantaged borrowers as they are typically young, must save for a deposit and are early in their careers and still building up their salaries.
Other things like closing credit cards and paying out car loans can have a big impact on borrowing capacities.
Recently we had a client who had a deposit but also a car loan, credit cards and a HECS debt, and we were able to increase their borrowing capacity by using their savings to payout those debts, allowing them to increase their borrowing capacity by 30%. We did need to ask for parents support with a guarantor loan to replace the savings/deposit we spent closing debts which they were happy to do.
For families looking to refinance or perhaps upsize the family home, apart from the tips above, the big thing is private school fees, which can range from $15,000 per year per student, all the way up to $45,000 per student and beyond (I’m looking at you Cranbrook)
The problem is that most banks look at that cost as an additional living expense, so if you have 2 kids at private schools, paying a combined $40,000 per year in fees, then the banks treat it like a loan repayment of $3,333 a month.
A good strategy, where possible is to set aside the school fees in savings in which case the banks can exclude that annual expense as it is not a living expense as the funds are set aside.
In the example used, if we either prepaid the school fees or set the funds aside as savings (you can borrow to do this), this could increase their borrowing capacity by circa $550,000 ($550,000 @ 6% interest rate over a 30-year term has a monthly repayment of $2,297).
For investors- yes you can look to increase rents, which have been happening off the back of COVID and a lack of available properties and strong demand, this will help increase your borrowing capacity.
What I see a lot of is investors who are making principal and interest repayments, that were relatively affordable when rates were 2-2.5% however with those same rates circa 6.4-6.5% now, the gap that investors need to chip in is far higher.
A strategy to consider is to take the loans back to interest only to reduce the monthly outgoings- this can boost your borrowing capacity with some lenders then acknowledging the lower monthly expense and therefore the borrowing capacity increases.
Another thing for investors with multiple properties are hit with a monthly property investment expense by lenders in addition to their normal living expense. Now on the one hand, it may cost $5,000 per year in council rates, land tax, etc but this used to be factored in by lenders only using 75% of the rent received, whereas now banks are still only using 80% of the rent received and then the additional investment property holdings costs whilst ignoring the negative gearing benefits.
There are some lenders on the market who do not include those additional property holding costs and we find that really helps investors borrowing capacities with have multiple properties.
Oftentimes a clients circumstances can be looked at far more favourably with one bank over another, in particular for clients who earn commission/bonus or who are self-employed.
Borrowing for self-employed clients is way more complex than for salaried borrowers and knowing which bank will suit each clients scenario can have a huge impact on borrowing capacities- for example if you own a company and that company has loans, perhaps for vehicles, equipment, overdrafts or business loans, then a lot of the major banks include those debts and repayments in your personal borrowing capacity.
Contrast that with other major lenders, who can completely ignore all of those business debts (which are paid for by the business anyway) and the difference is capacity can be huge.
Another thing to consider is debt recycling versus having large savings in your offset account.
Some clients we talk to are surprised they can’t borrow much, when they have plenty of equity in their home and large amounts of funds in the offset account, offsetting their home loan, this is due to the banks calculating your commitments based on the limit of your loans and not the balances- so reducing the limit can really help.
One thing that gives clients comfort is to have 1-2 years loan repayments in the offset account- now for clients that have more than that you may consider permanently paying down your home loan, which will reduce your monthly repayment and then allow you to borrow more to invest (obviously, keep a suitable amount of savings aside just in case).
Lastly, be sure to hit up your bank directly or broker to renegotiate your current interest rates- this too can lead to higher borrowing capacity as your monthly commitment will be reduced with a lower interest rate on existing debts.
About Daniel Pym:
Daniel is a multi-award winning mortgage broker and Director of Loan Market, Double Bay | Erskineville | Castle Hill. With a background in financial planning and finance broking he is well placed to assist borrowers find the ideal loan for their individual needs. https://broker.loanmarket.com.au/double-bay
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