Getting your finances right in the eyes of the lenders is like having a car engine that runs perfectly – you can go further and faster on the same amount of fuel.
It can often seem as though the decisions lenders make as to whether you can take out a mortgage are reached on a whim – or even at random. Too often, you can be turned down for a deal by one bank, only to be welcomed with open arms by another. How can there be such a difference?
It all comes down to something called ‘serviceability’. It’s simple in principle: lenders look at your income, your assets and your liabilities, and calculate the money left over – which can then be used to pay off your mortgage. It sounds simple enough – but each lender has its own unique recipe for assessing serviceability, with its own criteria. The situation is further complicated by the fact that lenders change their criteria on a weekly or even daily basis, based on their risk appetite; also, criteria can even vary within different arms of the same organisation.
Turbo charging your borrowing power
The fact that institutions’ serviceability criteria vary so much, and that they are regularly changed, means that it is very difficult to ‘tailor’ your financial position to suit particular lenders. However, there are measures you can take to improve your serviceability in general – and here are seven of the best.
1. Sort out your credit cards and other debt
If possible, pay out and get rid of most of your credit cards. You should also reduce your limits to the minimum that you need, not what’s ‘nice to have’, to minimise the negative effect credit cards can have on your borrowing power. You should also seek to get rid of personal loans if at all possible.
2. Be careful with your credit file
A little-known 'deal breaker' is that multiple credit report enquiries over the eight-to-twelve month period prior to application will mean that you may fail some lenders’ credit scoring systems. So, avoid too many applications which require a credit check in rapid succession.
3. Don’t undercharge your tenants
If you already have properties, charge the market rate for the property, and don’t discount: this will mimimise any discounting that lenders apply to your rental income.
4. Maximise your income – and stay put
Declare every piece of income you possibly can, over as long a period as possible. Lenders want to see income over a sustained period of time. If you’ve taken a second job, stick at it for at least six months. It also helps to remain stable in both your employment situation and in your residential situation – if you move house once a year, it’ll count against you.
5. Consider alternative options
If you’re having trouble satisfying serviceability requirement – especially as a first-time buyer – it may be worth considering a family guarantee or similar. More lenders are agreeing to allow someone with either a big enough deposit or a property to collateral to act as a guarantor.
6. Consult an experienced mortgage broker
Finally, it is worth consulting an experienced broker, and ideally one who deals with investors regularly. Brokers are up to date with the latest changes to lenders’ serviceability criteria, and typically have access to software which can match you with the right loan – both now and in the future.
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