With interest rates rising, one of the biggest changes that many homebuyers are faced with on top of higher repayments is their borrowing capacity being reduced.
When you go to a lender and apply for credit, they assess your ability to borrow based on your income and expenses while also factoring in your future borrowing costs. With higher mortgage rates, the overall money that you’d be able to borrow will also go down which can make things challenging.
Fortunately, there are some things you can do to help boost your serviceability.
One of the first things I advise people to do is to take a good look at their personal debt. Things like credit cards, personal loans and even to some extent things like car loans are all normal costs that you probably don’t need to take on but are typical of what many people do have.
If you already own property and have some equity built up, it might be worth looking at the possibility of consolidating some of your debts and rolling over the higher-interest personal debt into your mortgage. What this effectively does is reduces your overall interest repayments and at the same time can free up some serviceability.
If you keep the same level of repayments, you will end up paying down your debt much faster. Especially on things that attract very high-interest rates like credit cards.
The other benefit is that you can actually use the cash flow that you’ve freed up to put into something more productive like property. Property is what we would consider to be good debt, in that the underlying asset is something that is going to appreciate over time.
If you had $50,000 of bad debt, by turning that into equity, you’re effectively freeing up $100,000 that you can then use to put into some type of good debt, like another property.
The same sort of thing applies to your credit cards and more specifically your credit card limits. When a bank looks at your borrowing capacity they assess your credit card limit as if it is maxed out. You might have never even touched your credit card, but a bank will look at it as if you are using all of that credit that you have at your disposal.
For every $1000 on your credit card limit, you’re reducing your borrowing capacity by somewhere around $10,000. If you have multiple cards that have had a steadily increasing credit card limit over the years, you can very quickly wipe out a significant amount of borrowing capacity.
These small changes to the way you manage your debt might not sound like much but there is a compounding effect that takes place over time. Even if you can stretch your serviceability by another $100,000 that can make a big difference. You can potentially purchase a slightly better property in a better location, or one that has more features that appeal to owner occupiers like a car space, or you can buy in a good school zone. Over time you might see better capital growth which means that your $100,000 not only paid for itself, but it will help your wealth grow faster and ultimately larger.
If you are interested in the above, feel free to reach out to a Henderson buyers agent today for more information.
