How To Improve Your Borrowing Capacity If You Have Maxed Out

How Do Banks Assess Your Borrowing Capacity?

When applying for a home loan banks typically look at several key factors to assess your borrowing capacity and determine whether to approve your loan application:

  1. Income: Banks will assess your income to determine your ability to make regular repayments on the loan. This includes your salary, wages, bonuses, rental income (if any), and any other sources of income.
  2. Employment stability: Lenders prefer borrowers who have a stable employment history, as it indicates a reliable source of income to repay the loan.
  3. Credit history: Your credit history, including your credit score, will be evaluated to assess your creditworthiness. A good credit history indicates that you have a history of managing credit responsibly.
  4. Debts and expenses: Lenders will consider your existing debts, such as credit card balances, personal loans, and other financial commitments. They will also assess your living expenses to ensure that you can afford the loan repayments along with your other financial obligations.
  5. Deposit: The size of your deposit is an important factor in determining your borrowing capacity. A larger deposit typically indicates lower risk for the lender and may allow you to access better loan terms.
  6. Loan-to-Value Ratio (LVR): The LVR is the ratio of the loan amount to the value of the property. Lenders usually have maximum LVR limits, and borrowers with lower LVRs may be able to borrow more.
  7. Property valuation: The lender will conduct a valuation of the property to assess its market value. The loan amount may be based on the lesser of the purchase price or the valuation amount.
  8. Loan term: The length of the loan term can affect your borrowing capacity. Longer loan terms may result in lower monthly repayments but can also mean paying more interest over the life of the loan.
  9. Interest rates: Lenders will consider the current interest rates and your ability to afford potential rate increases in the future.

Overall, banks aim to ensure that borrowers have the financial means to repay the loan while managing their other financial obligations. They use a combination of these factors to assess your borrowing capacity and determine the terms of your home loan.

How Can You Improve Your Borrowing Capacity?

If you don’t have the borrowing capacity to buy a house, there are several steps you can take to improve your financial situation and increase your chances of securing a home loan in the future:

  1. Improve Your Credit Score: Your credit score plays a crucial role in determining your borrowing capacity. Make sure to pay your bills on time, reduce your existing debts, and avoid applying for multiple credit cards or loans within a short period.
  2. Reduce Existing Debts: Lenders consider your existing debts when assessing your borrowing capacity. Try to pay off or reduce your existing debts, such as credit card balances, personal loans, or car loans, before applying for a home loan.
  3. Save for a Larger Deposit: A larger deposit can improve your borrowing capacity and make you a more attractive borrower to lenders. Focus on saving as much as possible for a deposit by cutting expenses, increasing your income, or setting up a savings plan.
  4. Improve Your Income: Increasing your income can also boost your borrowing capacity. Consider ways to increase your income, such as getting a higher-paying job, taking on a second job, or starting a side business.
  5. Reduce Expenses: Review your monthly expenses and look for ways to cut costs. This can include reducing discretionary spending, renegotiating bills and utilities, or downsizing to a cheaper rental property.
  6. Seek Financial Advice: Consider consulting with a financial advisor or mortgage broker who can help you understand your financial situation, identify areas for improvement, and provide guidance on how to increase your borrowing capacity.
  7. Consider Alternative Lenders: If traditional banks and lenders are not willing to lend to you due to your borrowing capacity, you might consider alternative lending options, such as non-bank lenders, credit unions, or peer-to-peer lending platforms. These lenders often have more flexible lending criteria and may be willing to work with borrowers with lower borrowing capacities.
  8. Improve Employment Stability: Lenders prefer borrowers with stable employment and income. If you’re currently in a casual or part-time job, consider switching to full-time employment or securing a more stable job before applying for a home loan.
  9. Build a Strong Savings History: Demonstrating a consistent savings history can show lenders that you are financially responsible and capable of managing your finances effectively. Maintain a regular savings pattern and avoid large, unexplained deposits or withdrawals.
  10. Be Patient and Persistent: Building a strong financial profile and improving your borrowing capacity takes time and effort. Be patient, stay focused on your goals, and continue working towards improving your financial situation.

Remember, each lender has different lending criteria, so it’s essential to shop around and compare different home loan options to find the one that best suits your needs and financial situation. For more information you can visit: Strikeproperty

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