Home Loan Masterclass: 6 Borrowing Power Secrets Every Australian Should Know

Understanding Borrowing Power

Your borrowing power is essentially the maximum amount a lender will allow you to borrow for a home loan. It depends on various factors, including your income, expenses, credit score, and current interest rates. Understanding these elements can empower you to optimise your financial profile and potentially increase your borrowing capacity.

Secret 1: Clean Up Your Credit

A high credit score can significantly boost your borrowing power. Lenders in Australia often look for scores above 600, with higher scores leading to better loan terms. Regularly check your credit report and address any discrepancies or unpaid debts. Paying bills on time and reducing existing debt can also improve your score.

Secret 2: Increase Your Income

Higher income can directly translate to greater borrowing power. Consider avenues to increase your earnings, such as taking on additional work or pursuing a promotion. If you have a partner, combining incomes can also enhance your borrowing capacity. Lenders will typically assess your ability to repay the loan based on your household income.

Secret 3: Reduce Existing Debts

Lenders assess your debt-to-income ratio to determine borrowing power. Reducing existing debts, such as credit card balances or personal loans, can improve this ratio. Aim to pay off high-interest debts first and consider consolidating debts into a lower-interest option.

Secret 4: Save a Larger Deposit

A larger deposit can reduce the loan-to-value ratio (LVR), making you a less risky borrower in the eyes of lenders. In Australia, an LVR below 80% can save you from paying Lender’s Mortgage Insurance (LMI), further enhancing your borrowing power. Aim to save at least 20% of the property’s value.

Secret 5: Choose the Right Loan Product

Different loan products can affect your borrowing power. Fixed-rate loans offer stability, while variable rates might provide better flexibility. Offset accounts and redraw facilities can also influence your borrowing capacity. Consult with a mortgage broker to find a product that suits your needs.

Secret 6: Consider Family Guarantees

If saving a large deposit is challenging, consider a family guarantee. This involves a family member using their property as additional security for your loan. While it can boost your borrowing power, it also involves risks for the guarantor, so it’s essential to understand the implications fully.

Practical Tips and Advice

• Regularly review your financial situation and adjust your strategies accordingly.
• Keep track of interest rate changes and market trends.
• Engage with a mortgage broker who can provide tailored advice and negotiate better terms with lenders.

Common Mistakes to Avoid

• Don’t underestimate your expenses, as lenders will scrutinise your spending habits.
• Avoid job-hopping before applying for a loan, as stability is crucial for lenders.
• Don’t max out your credit cards or take on unnecessary debts.

How Esteb and Co Can Help

At Esteb and Co, we specialise in helping clients navigate the complexities of home loans. Our team of experienced mortgage brokers can provide personalised advice, assess your financial situation, and identify strategies to enhance your borrowing power. We’re here to support you every step of the way, ensuring you secure the best possible loan terms.