What Improves and Damages Borrowing Power?
There are a lot of good things happening in the property market right now, and forecasts for the rest of 2021 have been largely positive. As we start the year, now is a good time to take serious steps toward your property goals. No matter what you’re planning on, it helps to understand how your borrowing power will affect your relationship with lenders and, ultimately, the property you can afford. We’ll look at how different factors can either improve or damage your overall borrowing power.
What Improves Borrowing Power?
Comprehensive Credit Reporting (CCR) was mandated for Australia’s big four banks more than a year ago, but not everyone knows what it entails. The goal of CCR is to look at the borrower’s full credit history as a way for lenders to assess risk, using the bigger picture to make decisions.
Before, lenders might have only seen things like bankruptcies and credit enquiries. Now, they’re required to look at all repayment conduct, including the positive aspects too, such as how well you’ve managed your debt in the past two years. So if you’ve missed one payment because a family member took ill at the time, this wouldn’t be a cause for denial on a loan.
When lenders are considering CCR, here’s what they’re looking at:
Lenders look at how many credit cards you have and the total amount that you can spend on them up to their limit, regardless of whether you have used it or not.
Good Repayment Conduct
It’s more important than ever before to pay your bills on time. CCR will make it easy for a banker to disregard two late payments from three years ago, but it will be much more difficult to forgive two late payments in the last six months.
For self employed borrowers, lenders are looking at tax returns from the past two years, and while COVID is around they will also more than likely ask for interim financials such as BAS statements. The goal is to see how stable your income is and to get a good idea of whether your wage is sustainable for a home loan. If you’re keeping good financial records, you’ll be more likely to know where your money is going and how it’s affecting your daily expenses.
All lenders want to see home buyers who are ready to invest in their property. The more savings you’ve built up, the more equity you’ll start off with. Not only do you have a better stake in the property, but your payments will be lower and more likely to be paid in-full and on-time.
When you’re serious about a home loan, you should be preparing anywhere from 3–6 months in advance, depending on the lender. The best way to do this is to set up a budget. When you track your money, you have a better chance of controlling it. But perhaps even more importantly, you can show that you’re a responsible individual who will be a low-risk borrower.
What Damages Borrowing Power?
High Credit Card and Personal Loan Limits
The lower your credit card and personal loan limits are, the better your borrowing power. It’s not that creditors don’t understand patterns, it’s that they want to prepare for the worst-case scenario.
So let’s say that you have three credit cards with a total credit limit of $100,000. In the past year, you’ve spent exactly $1,000 of your available $100,000. Just because it’s unlikely you’ll change your mind next year and spend the full $100,000, it’s not an impossibility.
Late Payments and Bad Repayment Conduct
CCR is all about how many times you’ve done the right thing. If you’re constantly asking for more time to make payments or only paying off the bare minimum, it just doesn’t reflect well to the lender. The person reviewing your loan will predict that you’re likely to give the lender the same run-around.
The source of inconsistent income may be anything from seasonal jobs to erratic rental income. If your income yo-yos from month to month, it will damage your borrowing power. A lender wants to see that you’re doing everything you possibly can to avoid default. There is no magical power that can fully protect an individual from financial devastation, but consistency is probably the closest thing a lender has to it.
Writing Off Too Much Income
Many Self Employed people have aggressive tax strategies so that at the end of the financial year the taxable income is as low as possible. The more you write off, the less income you have that can be recognised by a lender to support a mortgage. If you’re constantly spending on your commercial enterprises, it will leave that much less to devote to house payments. You should speak to your accountant about your plans to buy a property and make sure that your tax and business spending strategies align.