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7 things to consider to increase your borrowing capacity

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One of the most important factors any investor needs to consider is how much they can borrow. The best intended goals, hopes and dreams can be undone if the borrower is unaware of what is achievable for them. There are 7 simple steps you can implement to improve chances of obtaining finance and increase the amount you can borrow. Let’s take a look:

  1. Reduce the number of credit cards and limits on the cards you have. For every $1000 that you remove from your credit card limit, you can increase your borrowing capacity by up to $5500, depending on the lender.
  2. Use a broker: Don’t shop around for the best rate as it could inadvertently end up with several credit enquiries on your credit report. Every time you apply for a credit card, personal loan, or interest free finance for furniture at a retail store, a credit hit appears on your credit record. The more credit hits you have the more of a risk you become to a lender. Using a broker can also help you use the best borrowing capacity calculator for your circumstances. Different types of income are treated differently, and can make or break a deal. The borrowing capacity of the borrower can differ by tens of thousands of dollars, depending on which lender you go to.
  3. Keep your paperwork up to date, especially if you are self-employed. It can make a huge difference in your rate and borrowing power when tax returns and assessment notices can be supplied to the lender. Self-employed borrowers do sometimes prefer to avoid tax, rather than to increase their taxable income on paper. If the taxable income was able to be increased on paper, it could aid in increasing the borrowing capacity.
  4. Never be a guarantor for family or friend on their loan, most lenders will consider you to be jointly and severally liable for the entire debt, yet, you have put yourself into a position of receiving absolutely no finance benefit. Of course, emotional benefit can outweigh financial benefit, just be aware you must be prepared to compromise on your borrowing capacity, and in turn your opportunities for a better financial future.
  5. When investing, diversify the properties you purchase. If you only purchase capital growth focused properties, the yield will be lower and you more quickly reduce your borrowing capacity. Consider having some higher cash flow properties in your portfolio in order to more positively impact on your borrowing capacity.
  6. Whilst purchasing in a trust or company is good for some, it does negatively impact on your borrowing capacity when there is no income being earned, other than rental income, in that entity. For example, if you have a job or have a separate ABN through which you operate from, you will not be entitled to use any tax deductions that could ordinarily be claimed from the property against your income. Many lenders can factor in deductable interest in their borrowing capacity calculators, without this being factored in, your borrowing capacity will be lower. Note; interest on a loan used for the purpose of purchasing an investment property is typically tax deductable.
  7. Living expenses can play havoc with your borrowing capacity, most lenders have increased the amount of living expenses attributable to each person on the loan, and those in the household/s of the borrowers. Lenders are also asking borrowers to itemise their expenses. The more you spend, the less you will be able to borrow. Borrowers previously could more easily understate their living expenses and often get away with it, but now lenders are clamping down on this and separating basic expenses from discretionary ones, the more discretionary expenses you have, the less you can borrow.

For example.

  • Basic living expenses (e.g. rates, utilities, repairs, food, transport, fuel, parking, clothing and personal care, cosmetics, rental costs/board.
  • Additional living expenses (e.g. investment property utilities, insurances, mobile phone, internet, newspaper and magazine subscriptions, dental and medical, private school fees, children’s activities, childcare, child support/ maintenance, recreation, entertainment, memberships, restaurants, holidays)

So, keep your expenses lower if possible, especially any additional expenses.

By considering these simple tips, you can positively contribute to increasing your borrowing capacity. You could increase the choices you have in life, whether it be where you live, what you can buy to live in, whether you can invest, and the number of investment properties you could obtain finance for.

About Andrew Crossley

andrewc@thebusinesswomanmedia.com'

Andrew Crossley is a property investment strategist and founder of Australian Property Advisory Group. He is also the author of the #1 best-selling books. The 100k Property Plan, Commercial Property and Residential Development Made Simple (Busybird Publishing, $24.95 and $15.95 respectively). For more information visit www.australianpropertyadvisorygroup.com.au

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