Before GFC it was very common to be able to borrow 12-15 times your income. With proper planning and skilled broker, it was even possible to go up to 20 time and many did. Due to APRA tightening the screws post-GFC it very uncommon now but here are some practical things that affect your borrowing capacity:
- CREDIT CARD LIMITS: This is a very basic one, most people have massive credit card limits. E.g. $12,000 -$15,000 & sometimes are not even using these limits regularly. Your credit card limit impacts your ability to borrow, if you can’t live without a credit card it might be worth looking at what limit do you actually need and use, as it impacts the amount you can borrow for investment purposes.
- ADDITIONAL LIVING EXPENSES: Lenders actually go line by line through your bank’s statement to pick up living expenses like Uber Eats, Maccas, Crown, Pubs, Restaurants, Gym memberships, bills, rates, insurances etc & compare against their internal estimate called HEM. Additional living expenses could hurt the amount you can borrow if the lender takes a hard line based on your past behaviour, so watch out.
- NOT DISCLOSING ALL YOUR INCOME SOURCES: See this is not that common but from time to time forget about things like bonus income, a commission earned, family payment like FBT A or FBT B, carer, parenting payment or income from shares (dividends) etc which all help bridge the gap between what you can borrow. So always stay on top of these things and prepare well before you apply for a loan.
- LENDERS ASSESSMENT RATE/ BUFFER: The rate you actually pay is no longer what the banks deem you to pay. They add 2.5% to it. They also add P&I to it, and they also assess it over the remaining P&I term. So, loan structure becomes important to maximise borrowing capacity.
- JUST BEING WITH A WRONG LENDER: Finally, not all lenders are the same, being a broker, I can vouch that I can punch in same numbers across 3 different lenders calculator and get different borrowing capacity. So, choosing the lender becomes very important due to lenders policies around living expenses, negative gearing, rate buffers and repayment calculations.
Paddy Boyal is the author and is a mortgage broker & was a licensed financial adviser. M: 0420 589 194 E: firstname.lastname@example.org