Maximizing Your Borrowing Power:
How to Calculate and Improve It
When it comes to fulfilling personal, home, or business-related financial goals, obtaining a loan can be a helpful solution. However, understanding that your current debt can influence the amount you can borrow from a lender is crucial. Excessive debt can even lead to rejection of your loan applicationIn this article, we will explore the calculation of borrowing power in relation to various types of debt and provide actionable tips to improve your borrowing capacity.
Calculating Your Borrowing Power:
Lenders assess your borrowing power by considering any outstanding debts or financial commitments that consume a portion of your income. They do so to gauge your ability to make loan repayments. The following types of debt can impact your borrowing capacity:
- Credit Card Debts: Unsettled credit card balances are taken into account when determining your borrowing power.
- Existing Personal Loans: Any existing personal loans that you are currently repaying will affect the amount you can borrow.
- Secured Car Loans: If you have a secured car loan, the outstanding balance will influence your borrowing capacity.
- Buy Now, Pay Later Debt: Debts accumulated through services like Afterpay can limit the amount you can borrow.
- Other Mortgage Debt: If you already have other mortgage debts, lenders will consider them in assessing your borrowing power.
- HECS/HELP Debt: Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) debts are also factored in.
Improving Your Borrowing Power:
While earning a higher income positively impacts your borrowing capacity, there are additional ways to enhance it:
- Live within Your Means: Reduce unnecessary spending on luxury items such as entertainment and vacations. By living frugally, you can allocate more funds toward loan repayments.
- Eliminate Unnecessary Debts: Pay off credit cards and strive to make extra repayments on existing debts like personal loans. This proactive approach will help decrease your debt load and demonstrate financial responsibility.
- Accurate Assessment of Affordability: Be honest with yourself and your lender about your financial capabilities. Discuss your desired loan amount and evaluate the corresponding repayment amounts with your lender. This transparency will ensure that you don't overburden yourself financially.
Seek Professional Advice:
If you are concerned about how existing debt might impact your financial situation, it is wise to consult a debt counselor or professional adviser. These experts can provide tailored advice on managing your debt effectively, improving your financial position, and maximizing your borrowing power.
Understanding how your borrowing power is determined in relation to different types of debt is essential when seeking a loan for personal or business purposes. By assessing your financial commitments, eliminating unnecessary debts, and seeking professional advice, you can optimize your borrowing capacity. Take control of your financial future by managing your debt wisely and making informed decisions to achieve your goals, see the calculator here.
What Level of debt do you currently have?
Are you planning to take out a loan for a personal or business purpose, or to buy a home? If so, then it is important to understand how your current level of debt can affect your ability to borrow money. Here are some frequent questions and answers to help you understand how debt can impact your borrowing power.
Q: What types of debt can change my borrowing power?
A: Any type of debt that you currently have can affect your borrowing power. This can include credit card debt, personal loans, secured car loans, buy now, pay later debt, mortgage debt, and HECS/HELP debt.
Q: Why does my current level of debt matter when applying for a loan?
A: Lenders want to know that you can make your loan repayments on time, and your existing level of debt can impact your ability to do so. If you have high debt or other financial commitments, this may mean that you have less disposable income available to make loan repayments.
Q: Can having too much debt cause my loan application to be rejected?
A: Yes, having too much debt or other financial commitments can impact your loan application and even cause it to be rejected. Lenders want to see that you can afford to make your loan repayments, and if you have a lot of debt already, this may be a red flag.
Q: How can I improve my borrowing power?
A: There are several ways to improve your borrowing power, including earning a higher income, living within your means, cutting unnecessary spending, and paying down existing debts like credit cards and personal loans. It's important, to be honest about how much you can afford to borrow and to speak to your lender about the size of your repayments.
Q: What should I do if I'm concerned about my current level of debt?
A: If you're worried about your level of debt or other financial commitments, it's best to speak to a debt counselor or professional adviser for further advice on managing your debt.
Q: If I have dependants can that affect my borrowing capacity?
A: Yes, the more dependants apart from a spouse can affect your borrowing capacity
Q: Before I lodge my tax return should I see my broker?
A: You don't need to see your broker before you lodge your tax return.
In conclusion, your current level of debt can impact your borrowing power, so it's important to understand how it can affect your loan application. By taking steps to manage your debt and improve your borrowing capacity, you can increase your chances of being approved for a loan that meets your needs.
With another Christmas celebrated and already showing up on our waistlines, a common topic of conversation for many of us in January is our New Year resolutions.
Whether it’s a pledge to give up smoking, get to the gym more often, or start (yet another) healthy eating regime, New Year resolutions usually have a self-improvement or healthy living focus. But what about your finances? A healthy financial situation is just as important to your well-being as a healthy diet and exercise regime. Here are a few New Year resolution suggestions for your finances that could make a big difference to your financial health in 2017 and beyond. If one of these appeals to you, please give us a call as we’d love to help you achieve your financial New Year resolutions this year.
“I will make a proper budget and stick to it.”
Did your credit card debt go up or down in 2016? Spending more than you earn is surprisingly easy to do and having to pay exorbitant credit card interest on all of your purchases just makes matters worse. The secret to turning this situation around is to create a proper budget for yourself and stick to it. It’s also a good idea to include repayments on your credit card as a weekly expense in your budget outgoings, so you can work on getting your debts paid off as well.
To create a realistic budget, list all of the things you need to spend money on and how much they cost. The amount you have left over each week is the amount you can afford to spend on the things you want, put into your savings account, or use to pay off your debts sooner. It’s also important to review your budget regularly to see how you are tracking.
If you have multiple credit card debts, or a variety of debts, you may find managing your budget a challenge as a large part of your income may be lost on interest payments. This kind of situation is frequently referred to as a ‘debt trap’. Talk to us about consolidating your debts to reduce your interest payments and make your financial situation more manageable.
“I will make an effort to achieve my saving goals.”
The ability to save money consistently is a talent that everyone should cultivate. It’s particularly important if you’re saving a deposit for your first home, as a lender will take your savings history into consideration when deciding if you are eligible for a home loan.
If you are the kind of person who finds it hard to stick to a budget, can’t resist impulse purchases, or indulges in ‘retail therapy’, then you may like to consider installing an app on your mobile phone that supports your efforts to save. ASIC’s MoneySmart website offers a variety of excellent free apps designed to help you manage your finances:
- TrackMyGOALS integrates techniques that are proven to work for successful savers.
- TrackMySPEND helps you see where your money is really going so you can adjust your spending habits to save more. Even just committing to reducing the number of take away coffees you buy each week can make a big difference over a full year!
“I will stop wasting my money on rent.”
For many people, choosing to rent a property instead of buying one boils down to a lifestyle choice. It may be more affordable to rent a property in a location where you enjoy living, than it is to buy one. But the consequence of this choice is that when property prices rise, you are potentially missing out on some significant capital gains that could be important to your financial well-being later on in life.
What’s more, the money you spend on rent is wasted – you are potentially paying off someone else’s investment when you could be paying off a property of your own. So the question is: do you have enough money for a deposit?
If you have been saving regularly and have some money in the bank, now is a great time to take stock of what kind of property you may be able to afford this year. Just give us a call and we’ll be happy to sit down with you and help you work it out!
Getting on the property ladder may mean that you have to consider a location where you can afford to buy, rather than a location where you prefer to live. It may mean giving up your short commute home from work, or easy access to your friends and family, favourite bars, shopping venues and cinemas. But with property prices rising steadily, the long-term benefits could have a significant impact on your future financial security and retirement lifestyle, so it could be worth it to act now.
“I will review all of my financial accounts, including my home loan”
When was the last time you stopped to think about how much money you are paying on fees every year for your mortgage, bank accounts, credit cards and superannuation plans? Most people would be horrified to discover exactly how much money they lose every year in fees and charges across their financial accounts – so it definitely pays to review them regularly and cancel any unnecessary accounts you hardly ever use and don’t really need.
For example, the fees and charges you pay on your superannuation accounts can be quite high and they often go unnoticed. Over the years, these fees and charges may add up to make a big difference to the balance of your super on retirement. The fact is, if you have more than one superannuation account, you are paying double the fees you need to pay! Consider consolidating all your super accounts into one as soon as you can.
The same rule applies to your credit cards. How many do you really need? What are you using them for? If you have more than one, it may be a good idea to transfer all of the balances to one card using a free balance transfer offer. This not only has the potential to save you a significant amount of money on fees, it could also save you some money on interest and perhaps, help you to pay off your credit card balances sooner. Don’t be tempted to keep all of the old cards though, remember to cancel them as soon as you make the balance transfer.
If you have a mortgage, now is a good time to look at which features and benefits it provides, and if you are using them. Do you really need them? Is your home loan the most suitable for your current financial goals? If not, talk to us so we can see if you could be saving on fees, getting a more favourable interest rate or accessing the loan features you need!
We can help you achieve your financial New Year resolutions
Our role is to help you arrange your credit and finance to maximise the money you have. We’re here to help you save on interest wherever possible. Whether it’s time for a home-loan-health check on your existing mortgage, or you would like to find out how much you can afford to spend on buying a property, you’ll find our expertise and support invaluable in helping you to achieve your goals. We are even willing to help you find better ways to manage your debt and plan to build wealth for your future.
Financial success means setting some financial goals and making a step-by-step plan to reach them. With a credit and finance professional on your team, you are much more likely to get where you want to be. If you would like to buy a property in 2017, then we can help you achieve your goal by assisting with everything from setting your purchasing budget and getting pre-approval on your home loan, to supplying you with insightful property market data so you can locate the right home to buy more quickly.
Make sure your New Year is a happy one by talking to us about getting on top of your finances. It is one New Year resolution you’ll find very easy to keep! Call us to make a time today.
It was the Reserve Bank's first meeting in 2017, as the board does not meet in January.
The decision came as absolutely no surprise, with all 72 economists surveyed by Reuters expecting the cash rate to stay at 1.5 per cent.
The relatively new Reserve Bank governor, Philip Lowe, writing just his fourth post-meeting statement, took a very neutral stance on the future direction of the cash rate.
"Taking account of the available information, and having eased monetary policy in 2016, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time," he concluded.
The bank is sticking with its forecasts for economic growth to come in around 3 per cent, brushing off the economic contraction recorded in the September quarter GDP figures, released in December.
Citi's economists interpret this as a strong signal that interest rates will remain on hold for an extended period.
"With inertia in both guidance and forecasts, the earliest possibility of a live RBA meeting won't be until the May 7 board meeting, which will be after the first quarter 2017 CPI [inflation] result and after three more labour force reports," the bank's analysts wrote in a note.
"Our central case remains no change in rates this year, but that the market is under-pricing the risk of easing."
Rising dollar a concern for RBA, but 'unperturbed' on housing
However, this outlook could be complicated were the Australian dollar to build on its recent strength.
"The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom," the governor noted.
Further rises in the Australian dollar, towards and past 80 US cents, could potentially provoke the RBA into cutting interest rates to try and lower the currency and sustain export competitiveness.
One widely cited constraint on the possibility of further rate cuts is the strong price growth in Australia's two biggest housing markets - Sydney and Melbourne.
On that front, the governor made a lot of factual observations, but drew no conclusions about what the state of the housing market meant for monetary policy setting.
Although he appeared relatively relaxed about the effectiveness of the banking regulator APRA's measures to avert excessive risky home lending.
"With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments," Dr Lowe added.
RBC economist Michael Turner observed that the governor, "sounded relatively unperturbed on developments in the housing market."
There are two other Reserve Bank events on this week that are more important than the rates meeting.
On Thursday night, RBA governor Philip Lowe will deliver his first speech for 2017 at an economics dinner in Sydney.
On Friday morning, the RBA will release its latest quarterly Statement on Monetary Policy, which should give a clearer indication of the outlook for interest rate movements this year.