How can investors improve their loan serviceability?
While the average borrower’s lending capacity has certainly dropped upwards of $100,000 in a mere matter of months, there are some simple ways to get the most from your serviceability, according to RateCity.
According to the comparison site, a borrower earning the average wage in May 2022 has seen their maximum borrowing capacity drop by more than $170,000 since the Reserve Bank of Australia began lifting rates last year.
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While it does seem all doom and gloom, RateCity has raised a number of ideas for would-be investors to lift their borrowing capacity.
According to research director Sally Tindall, all it takes is a little “spring cleaning” of finances prior to applying for a loan.
“It’s astounding what cutting up a credit card and cutting back on unnecessary spending can do to your chances of getting approved on a home loan,” she commented.
These options are outlined below:
- Increase your income
If you believe you are a hard-working employee, ask your employer for a pay rise.
While it can be an awkward conversation, “it could boost your borrowing capacity by tens of thousands of dollars.”
RateCity noted that banks do often wish to see three months of pay slips so make sure you ask well ahead of time.
- Look for low rates
With finance stress tests done on the rate investors are applying for plus an additional 3 percentage points, it becomes clear that “the lower your variable rate, the more you are likely to be able to borrow.”
This is where a broker may come in handy, especially considering some banks have bigger risk appetites than others.
- Spend less, save more
The bigger the deposit, the less you need to ask a lender to provide.
RateCity offered the reminder that a larger deposit will also help you minimise or even remove the need to pay lenders mortgage insurance too.
Save money however you can. This is where budgeting can be your best friend.
- Clean up your bank account
Boosting your savings has the added benefit of showing the bank just how frugal you can be.
Little luxuries, such as food deliveries and multiple streaming services, can actively work against you when you are being assessed for a loan.
- Close down your credit cards
Credit cards “blast a hole in your borrowing capacity”, RateCity revealed.
Even if you are on the ball with paying off your balance, the banks “have to assume you could max out your card.”
- Pay down debts
Try to clear yourself of as many debts as you possibly can.
You should also steer clear of buy now, pay later platforms, with RateCity conceding that the services can “raise eyebrows”.
Even with the added benefits of a spring cleaning, Ms Tindall has offered a word of warning to those people “planning to borrow every last dollar from the bank.”
She urges investors to “pause and consider the alternatives” before jumping in.
“Starting smaller, opting for an investment property, waiting and saving up for a bigger deposit are options all worth considering before maxing out your borrowing capacity,” she flagged.
“If you are about to sign up for a new home loan, look at the debt you’re taking on and make sure you are comfortable with the mortgage repayments if rates rose a further 3 percentage points.
“While this is, at this point, unlikely in the short term, a loan is for up to 30 years and a lot can happen in this time,” she concluded.
