Looking to buy a house but not quite being offered what you want? In today’s property market, being short before an auction can have huge impacts, but it’s not all doom and gloom. With a few small tweaks, could increase your borrowing capacity massively.
In this episode, we break down the impact of specific liabilities on your borrowing capacity, using a relatable case study of a couple earning $100,000 each, looking to buy their first home with a 20% deposit.
While we acknowledge that a 20% deposit may be unrealistic in today’s market, and for first home buyers you might only need 5% now, but it serves as a useful framework for our discussion. We start by establishing a baseline borrowing capacity of just over $1m for our hypothetical couple, assuming no liabilities or dependents.
From there, we explore how various financial obligations can significantly reduce this capacity. For instance, we discuss the common scenario of an $80,000 car loan, which reduces their borrowing capacity by over $217,000, or approximately 21%.
We also examine the effects of credit card limits, revealing that even a combined $20,000 limit can further decrease their borrowing capacity by around 11%.
We delve into the impact of dependents on borrowing capacity. Adding one dependent results in a decrease of $49,000 (6.7%), while two dependents drop it by an additional $36,000.
We highlight that having dependents affects borrowing capacity less than one might expect, especially when compared to liabilities like car loans and credit cards.
Throughout the episode, we emphasise the importance of managing debt effectively. We discuss strategies for increasing borrowing capacity, such as consolidating credit card debt into personal loans with lower monthly repayments, which can help improve overall financial standing. We also touch on the potential benefits of paying off high-interest debts, like car loans and credit cards, to enhance your financial profile.
As we wrap up, we provide practical tips for listeners looking to improve their borrowing capacity. These include reducing living expenses, increasing income through consistent overtime, and the importance of consulting with a mortgage broker to navigate the complexities of borrowing.
We encourage our listeners to take control of their financial futures and make informed decisions about their borrowing capacity.