Maximising the amount a lender will hand over to you
isn’t about trying to take on unmanageable levels of debt. It’s a matter of smart and what should be simple steps.
1. Reduce short term debts
Car and equipment loans are materially detrimental to your borrowing capacity. The reason being, the lenders assume your current repayments will go on for the next 30 years (even though they may only be scheduled for the next 5 years). The result is a $100,000 car loan can reduce your investment mortgage borrowing capacity by up to $500,000.
2. Reduce your credit card limits
If you have unused credit cards with limits that are more than you need, then cancel those cards. Also, cancel any other cards – such as department store cards – that give you credit. Typically most home loan credit providers apply a 48% interest rate loading penalty to your existing credit card limits rather than the normal home loan servicing limit of around 6%.
3. Stop using After-pay style of loans
If you are using “afterpay” style of loans, stop it. Many credit assessors frown on the use of this and see it as a sign of personal fiscal mismanagement. It is a difficult conversation to have when a credit assessor asks “Your client wants to borrow $1.5 million for a home, but can’t afford to pay for shoes without using afterpay!”
4. Update your payslip records
Try to have your PAYG income tax return as up-to-date as possible. This gives a better historical view of your income than just the two most recent payslips. In particular, if you are earning bonus income, we will need your last two years of income tax returns.
5. Maintain your financial records
If your self-employed, it is important that your financial statements, tax returns and ATO payments are up to date at all time. Similarly, if you have multiple trusts and company structures maintain a corporate diagram of how they interact. If one of the entities does not operate anymore, close it.
6. Check your credit rating
Check your credit rating before applying for a mortgage. Due to changes to the Privacy Act from 12 March 2014, your rating may not be as healthy as you thought. Ask us and we will provide you with a copy.
7. Investigate family pledges
Guarantor or family pledges may let your parents or family take out a second mortgage on a percentage of their own property to guarantee repayment to the bank if you fall behind.
8. Shop around lenders
Different lenders define income in so many different ways that it pays to use a credit adviser who knows their way around what’s included and what’s not. One lender may allow share dividends as income, while another lender may not.
9. Shop around for the right mortgage
A good credit adviser will help you choose the most appropriate mortgage. Even with one lender, your borrowing capacity can vary due to the loan type that you choose. If you add features such as a line of credit this can reduce the amount you can borrow.
10. Consider shared equity
Some lenders will give you a larger mortgage in return for a certain share of the profits when you sell. If you don’t make a profit, then the lender does not take a share.
11. Take a long loan
While 30-year mortgages have been the norm, that’s changing to 40 years in some cases. A longer loan cuts your repayments, but increases the total interest you will pay over the life of the loan.
12. Save more, save early
Lenders look for consistent saving records, preferably for more than six months. Sometimes these savings can come from cost savings. For most of our busy executive clients who difficulty managing their time we can offer an expense review service to identify cost savings through analysis of your bank account data.
If you would like to discuss more, please contact us below.
