Press releases
How to improve your borrowing capacity
29/04/2010
Since the mid 90s Australian mortgage providers have been operating under well-constructed regulatory guidelines designed to encourage responsible lending.
Smartline Personal Mortgage Advisers Managing Director Chris Acret says one of the most successful aspects of these guidelines has been the Ability to Repay Test, which is commonly referred to as serviceability.
“Put simply, financial institutions must demonstrate they are satisfied that borrowers can afford to repay their debt,” Acret explains. “If lenders don’t do this, they risk their right to foreclose on a client in the event of default.
“Lenders interpret the Ability to Repay Test in different ways and contrary to popular opinion, the loan amounts lenders deem to be responsible also differ greatly.
“In fact, a recent enquiry made by one of our advisers determined – from a range of 22 mortgage lenders – that a single borrower on a gross annual salary of $60,000 and a credit card liability of $5000 was able to borrow approximately $277,000 with the most frugal lender and approximately $372,000 with the most expansive lender.
“This demonstrates the range within which lenders interpret a borrower’s ability to repay – and that it pays to shop around.”
Mr Acret says in response to the GFC lenders have progressively tightened their Ability to Repay Calculations.
“These changes certainly don’t mean that securing the right loan for your needs is an insurmountable task, but it is certainly a lot more challenging and time-consuming to wade through the policies, loan types, rates and lenders on offer,” he said.
“At these times, the advice and guidance of an experienced mortgage adviser can be invaluable.”
Smartline’s tips and tactics to assist borrowers to meet the Ability to Repay Test:
- Consider consolidating unsecured debts into your mortgage.
Typically, unsecured debts such as personal loans and credit cards have short repayment terms that force you to reduce your debts with expensive monthly repayments. These high repayment levels impact the banks’ Ability to Repay Calculation for your mortgage because unsecured debt limits the amount of uncommitted funds you have available to repay the proposed mortgage.
- Credit cards – cancel the ones you don’t use and reduce the limit on the ones you wish to keep.
If you have any unused credit cards or credit card with limits that far exceed your need for credit, then it makes sense to either cancel the limits or reduce the limits down to a manageable level. When most lenders assess your ability to repay a mortgage, they assume that your credit card will be fully drawn up to its limit.
- Keep financial records up to date.
One of the most common reasons borrowers find themselves well short of their anticipated borrowing levels is that they don’t have up to date financial information to prove their income levels to the lender. Simply completing your tax returns on time can help your mortgage adviser secure the loan you’re after.
- Select the right loan product.
Even within one financial institution there can be big difference in borrowing capacity levels based on the product you select. Product features such as interest only repayments, fixed rates, variable rate discounts and lines of credit can all impact how much the lender will offer.
Shop around – income type is treated differently by nearly every lender.
Lenders can be very selective when it comes to the type of income they include in their repayment capacity calculations. Some income types may be excluded all together by one lender and fully included by another.
Almost every lender treats income derived from dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents differently.
As always, talk to your Smartline Personal Mortgage Adviser for more information.
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