While most new investors understand that their borrowing capacity is related to their income, most wouldn’t realise that there are a couple of hidden costs that almost everyone has that can seriously impact your ability to purchase a home. As an experienced buyers agent in Sydney, I know what can affect your borrowing capacity.
The first and most common are credit cards. The interesting thing about credit cards is a lender is far more interested in your credit limit than what you’re putting on them.
As a general rule, every $1,000 of credit your receive, means your borrowing capacity will be reduced by around $7,000.
Most people assume that if they aren’t using their credit card then that’s OK. However, that’s not the way the bank will look at it. If you’ve got a card and the credit available to you, a lender will assume that it is maxed out, regardless of the way you use your cards.
Most people will have around a $10,000 limit spread across a few cards that are just sitting in their wallets. They might not even need them, but a lender will reduce your capacity, by around $70,000.
A lot of people just keep taking the credit limit increases, every time the bank offers it to them, even if they don’t need it. That’s definitely something you need to avoid. While it might be great to have a $30,000 ‘platinum card’, it’s likely you’ve just lost around $200,000 in borrowing capacity instantly.
On top of that, we see that a lot of people, especially younger ones, like to put things like trips and holidays on their credit cards. While it’s easy to do and you might really want to take that holiday to Thailand or Bali, when you come back you’ll have a significant debt at a higher interest rate if you can’t pay it off.
Lenders will look at these types of debt negatively and this will weigh even further on your borrowing capacity. A combination of high credit card limits and mounting debts could quickly see your borrowing capacity slashed by $200,000 pretty easily.
The other hidden drag on your ability borrow is quite often car loans. Everyone loves to have a brand new car. You can show it off to your friends and it’s much nicer to drive.
The catch is that car loans come with sky-high interest rates. A $40,000 car loan, which is not that much based on how much new cars cost these days, on a seven-year loan term can reduce your borrowing capacity by $100,000.
As you can see, these few areas can really make a big impact on what you’re actually going to be able to buy.
Let’s say based on your income, you could afford a $980,000 loan. After taking into account your recent overseas holiday which was put on your credit card, your other spare credit cards you use for your day to day living expenses and shopping as well as your ongoing debt from your car loan – you could be looking at around $300,000 less borrowing capacity.
That would mean your $980,000 house has just been shrunk to $680,000.
Put this in context as to what you can buy in Sydney at those different price points. There’s a massive difference in the location and quality of property that you’re going to be missing out on, just because of these couple of hidden costs that are weighing on you.
The good news is, these are simple things that you can take care of. Getting rid of extra credit cards is the fastest and most obvious one. Even consider using a debit card and paying for things like trips out of your savings that you’ve budgeted for.
It might also be worth driving a slightly older car for a few years, while you build up your property portfolio. Your friends will probably be more impressed with a multi-million dollar property portfolio, rather than a new car and so should you.