The latest affordability report from the Real Estate Institute of Australia (REIA) showed that the proportion of income required to meet the average loan repayment in Australia increased to 44.9% over the March 2023 quarter, the highest since September 2008. With the further Reserve Bank rate increases in May and June, we can expect this ratio to rise as a direct consequence, making housing affordability deteriorate for Australians whose income has not increased.
While there is no simple solution, there are some strategies that could help improve your borrowing capacity, to enable you to purchase your desired home or investment property.
#1 Knowing and improving your credit score
Lenders will check your credit score to determine your financial health and your risk profile as a potential mortgagor. You can obtain your free credit score report within a minute or two via www.equifax.com.au to determine if you have any unpaid loans, defaults or judgements against your name and what your credit score is. This will allow you to work towards rectifying any negative reporting to improve your credit score before applying for a loan.
#2 Increase your income
If a pay rise isn’t an option, you could consider committing to additional shift work or overtime as some lenders will attribute this to your borrowing capacity at different shading levels. Lenders have different minimum timeframes for you to be earning overtime before they would consider relying on that income (generally 6-12 months).
Alternatively, you could consider purchasing the property as an investment initially to benefit from the rental income and any potential negative gearing benefits before moving into the home at a later date. Consulting your tax adviser is recommended as there may be tax considerations as well as the First Home Buyer Grant qualification to consider. At DPM we have a team of specialised tax advisors that are available to help navigate any tax considerations or questions you may have.
#3 Pay off your HELP debt early
Let’s say you earn $200kpa but have a “small” HELP debt of $40k. Your annual repayment towards this debt is 10% of your income, or $20,000. While the debt is relatively small, the annual commitment is assessed on the level of income rather than the amount owing. This in turn erodes your borrowing capacity significantly. Depending on your personal circumstances, it may be prudent to consult your tax adviser and consider paying the debt out earlier, depending on the impact on your borrowing capacity if you’re seeking to apply for a loan.
#4 Pay off your ATO Debt
Owing the government back taxes will appear on tax portals and in some cases where payment arrangements have not been entered into, this debt can also be recorded on your credit report. If you have an ATO payment plan in place, the monthly repayment is classified as an expense by lenders and would need to be disclosed and accounted for when assessing borrowing capacity. Having foresight from your accountant regarding future tax obligations can assist you to better plan and even fund them.
#5 Reduce or close your Credit Cards and Buy Now Pay Later facilities
One of most common misconceptions is that if you pay the balance on your credit card to zero each month or just have the occasional card that you only use when travelling and for the remainder of the year it sits in the back of your wallet that these are not considered liabilities. Whilst this can be a good habit to get into, the fact is lenders will assess your borrowing capacity based on the limits of your debts (mortgages, credit cards etc.) and not the balances as these facilities provide you with the opportunity to borrow up to those limits at any time.
Paying off your $30k credit card each month and not accruing any interest charges is great but it is still considered a $30k liability when it comes time having a loan assessed. So before applying for a home loan, review any cards you don’t use. And if you do use them, maybe look at reducing their limits as much as you possibly can, or chat to your lender about it! Buy Now Pay Later (BNPL) facilities such as Zip Pay and After Pay are just like your credit cards and are considered liabilities.
#6 Reduce your expenses and save a larger deposit
Aside from your income, lenders will also scrutinize your living expenses such as groceries, recreation, insurance, utility bills, school fees and childcare costs etc. Cutting down on your living expenses will not only help you save for a larger deposit, but it could also boost your borrowing capacity. It could be beneficial to review your current energy bills, phone bills, insurance and where you do your supermarket shopping and sticking to a stricter budget.
For first home buyers, another tax effective strategy can be the government’s First Home Super Saver Scheme. The first home super saver (FHSS) scheme allows you to save money for your first home in your super fund by making voluntary contributions (both before-tax concessional and after-tax non-concessional) into your super fund to save for your first home. If you meet the eligibility requirements, these voluntary contributions can be used (up to a limit) along with associated investment earnings to help you purchase your first home.
You can find further information on the FHSS Scheme here.
#7 Consult a mortgage broker
Most mortgage brokers do not charge you a fee for their service as they are remunerated by lenders when your loan settles. Each lender has their own specific criteria for calculating your borrowing power, so while approaching your existing bank may be easy as they have ready access to your accounts, you are not always rewarded for loyalty. Going to the one bank may not achieve the best outcome for you as they are restricted by their own credit criteria. A good broker will have access to multiple lenders and will recommend the lender most suitable for your specific needs. Using a mortgage broker takes the legwork out of applying for a home loan as they can guide you throughout the application process to ensure you have the best chance of securing a loan approval.
#8 Cheap is not always best
While the option with the lowest interest rate is always attractive, depending on your circumstances and long-term financial goals, the cheapest loan may not always be the best. You need to consider the full terms and features offered as part of the loan package before making a decision
Key features to consider:
- Having an offset account linked to your home loan or the option to make additional repayments and redraws for free may assist in reducing interest costs over the life of the loan and allow you to repay it faster.
- The potential to increase borrowing capacity at a slightly higher rate with a different lender.
- The pros and cons of a loan that requires repayment in a short timeframe with a low interest rate vs loan with a marginally higher interest rate and a more flexible / longer repayment period that may have a lower monthly repayment overall.
- Lender Credit Policy is always crucial when deciding where to apply, as each lender has different credit criteria regarding how they assess base income, overtime wages, self-employed income, loan to value ratio (LVR) against certain property sizes and locations.
- Timeliness of credit decision – some lenders can provide a pre-approval within 48 hours while others can take 4-6 weeks (potentially longer depending on individual circumstance).
- Lender with a branch network versus lenders with only online banking.
For a complimentary and confidential assessment of your borrowing capacity please click here to get in touch with a DPM Finance Consultant.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.