When it comes to borrowing for a home or investment, learning how to increase your borrowing power can help you secure a better deal. But it’s important to strike a balance between borrowing enough to meet your goals – and not overextending your finances.
Understand your borrowing power
Your borrowing power is determined by several factors, including your income, expenses, credit history, and the type of loan you’re applying for. Lenders use these to assess how much you can afford to borrow without becoming financially strained. To maximize your borrowing power, start by understanding what lenders are looking for.
Improve your credit score
A higher credit score can lead to better loan terms, including a larger loan amount and lower interest rates. To boost your credit score:
- Pay your bills on time
- Reduce credit card debt
- Avoid opening new credit accounts
- Check your credit report for any errors
Reduce your debt-to-income ratio
Your debt-to-income (DTI) ratio is a key factor in determining how much you can borrow. The lower your DTI, the more lenders are willing to lend you. To improve your DTI:
- Pay off high-interest debts
- Avoid taking on new loans before applying for a mortgage
- Consider consolidating debt to lower monthly payments
Increase your deposit
A larger deposit means you need to borrow less, which in turn can improve your borrowing power. Aim for a deposit of at least 20% to avoid paying for Lenders Mortgage Insurance (LMI), but even a smaller deposit can work in your favor if you can demonstrate strong financial habits.
Choose the right loan product
Different loan products offer different benefits. To maximise your borrowing power:
- Consider a variable rate loan for flexibility
- Look into interest-only loans if you’re planning to make larger repayments in the future
- Compare loans from multiple lenders to find the best terms for your situation
Avoid overcommitting to a loan amount
While it may be tempting to borrow as much as possible, it’s important to ensure that your monthly repayments are manageable. Overstretching your budget can lead to financial stress and difficulty meeting other obligations. Be realistic about your ongoing living expenses and make sure you leave room in your budget for unexpected costs.
Factor in future changes
Consider how your financial situation might change in the future. Will you be getting a pay rise? Do you plan to start a family or make significant career changes? Factor these potential changes into your budget to ensure you can comfortably manage your loan repayments long term.
Seek professional advice
A mortgage broker or financial advisor can help you assess your borrowing power and recommend strategies tailored to your financial goals. They can also guide you through the loan application process, ensuring you get the best deal.
Final Thoughts
Maximising your borrowing power is about making informed decisions and planning for the long term. By improving your credit score, reducing debt, and choosing the right loan product, you can secure the financing you need without overextending your budget.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent. Content developed in partnership with IFPA.
Subscribe to our newsletter to read about ‘All things finance’
At UFinancial, we love talking about finance-related matters. From home loans and refinancing to financial planning, investing, and tax.
