How first home buyers can boost borrowing power
“How much can I borrow?” was Google’s most popular home loan question in the past 12 months.
ME did the analysis, which shows Australians made the enquiry more than 25,000 times, highlighting the dilemma housing affordability is causing many buyers.
Knowing your limit is particularly important for first home buyers – both in terms of maximising buying power but also ensuring you don’t overextend yourself.
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.
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.
Take the following steps to boost your borrowing power:
- 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.
- Consider reducing 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.
- Pay down other debts. If there’s money owing on a car loan or personal loan, pay it down to boost your borrowing power. 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’.
To confirm how much you can borrow, speak to a home loan expert and always get pre-approval so you have a guaranteed borrowing limit – otherwise you could be left in the lurch come auction day.
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