Ways to increase your borrowing power for a property

Given property values on the rise, understanding how to enhance your home loan serviceability can mean the difference between obtaining the keys and being shown the door. Evaluating your borrowing capacity allows you to determine what kind of homes you can afford to purchase. Prospective homeowners and investors frequently spend time looking at properties that are out of their price range as they do not realize how much time they will be able to borrow for a home loan.

Simply explained, borrowing power is the mortgage amount that a lender is likely to accept you for depending on your financial position. A higher borrowing power indicates that lenders believe you will repay a larger loan.

What is home loan serviceability?

Every time a lender loans money to a home buyer, they are effectively making a business investment. As a result, they must determine whether you are a safe bet, which they do by evaluating your house loan serviceability.

It is not merely just for the benefit of the bank. If you obtain a loan and are unable to repay it on time, your ability to obtain future loans will be hindered due to a blemished credit score.

How it is calculated

The serviceability is estimated by adding all of your revenue, including your salary, rental income, and investment interest, and then subtracting your spending and other repayments, such as your various loan repayments.

Although, it is not always clear, especially when factors such as your employment status (i.e., contractor, freelancer, or full-time) and the number of dependents you have are considered. Lenders will calculate your mortgage at roughly 2.5 percent higher than the market rate, or at 7.5 percent – 7.8 percent, as part of the process of assessing your serviceability, to assure that if interest rates rise, you will still be able to confidently pay back your loan.

The benefits of increasing your home loan serviceability

The good news is that house loan serviceability is not a fixed condition; there are steps you can do to enhance it and thus increase your chances of obtaining a loan at a fair rate from a variety of products. Another advantage of higher serviceability is possessing a larger buffer to reduce risk if interest rates rise. This will relieve a lot of stress and provide you with a secure net to fall back on if something unexpected happens.

Here are five things recommended to improve your home loan serviceability.

  1. Reduce credit limits

Even if you have no debt on your credit card, your limit will be treated as prospective debt when lenders evaluate your situation. As a borrower, having fewer credit lines and eliminating that potential risk will make you much more appealing to the lender. You have the ability to modify your credit score if you are aware of it. Even if things are not looking good, commit to making regular, on-time debt and bill payments. Remember to check your credit report for mistakes, which might occur over time.

  1. Aim for stable employment

Some lenders may consider self-employment or contractors as a danger. If you are in a new position and still on probation, this can have an impact on your serviceability; thus, it is preferable to apply for the loan after you have completed probation, as this allows you to establish a consistent and steady revenue stream. Although with the right expert by your side it is possible to get your application approved.

  1. Finish off BNPL loans

Buy Now Pay Later (BNPL) products are now widely accessible in most retailers in New Zealand; they are simple to use and may be viewed as an excellent method to manage cash flow; nevertheless, many individuals are unaware of the impact they have when seeking for a home loan.

BNPL activities frequently appear on credit reports, and generally, they have the same impact as credit cards in demonstrating when you are over-committing yourself through these services. Remember to pay off all of your debts before applying for a loan to improve your serviceability.

  1. Curb spending

Before purchasing a property, it is essential to plan and save money, not only for the deposit but also to prove your spending habits are healthy to the lender. As you begin to consider acquiring a house loan, it is critical to reduce your purchasing habits.

The lender will need to examine your bank statements when you borrow money, and if you spend a lot of money on takeout and leisure, this will impair your serviceability. Banks need to see that you have appropriate spending habits so that they can trust you to meet your repayments.

  1. Choose the right lender

Determine what you want and browse around for it. There is now so much competition in New Zealand, and with rates constantly changing, there is no better time to locate the finest products on the market.

So, if you are seeking for low-interest rate for your newest purchase, contact our experienced mortgage broker immediately and get your dream home journey on track.

Benefits of Refinancing

Refinancing entails repaying your current home loan with a newer one. This could be with a new lender or a current lender, and it could be for a number of reasons.

The refinancing process is comparable to the application process for your original loan, and hence refinancing can take four-eight weeks on average. After all, the process will vary depending on your specific scenario, and some lenders may even be able to provide a quick refinancing. In this section, we will look at the refinancing procedure and how long it can take to refinance your house loan.

  1. Save money

In today’s market, no homeowner can stand to believe that their loan is a fair deal. If you have held your mortgage for a few years, there is a good possibility you may save money. You may be eligible for more savings than you anticipate by achieving a lower interest rate and lowering your mortgage repayments. One of the most compelling reasons to refinancing is to lower the interest rate on your current loan. Historically, it has been assumed that refinancing is a good option if you can cut your interest rate by at least 2%. Conversely, many lenders believe that a 1% savings is a sufficient incentive to refinance. Lowering your interest rate not only saves you money, but it also accelerates the pace at which you create equity on your property and can shrink the amount of your monthly payment.

For example, a 20-year fixed-rate mortgage with a 5% interest rate on a $200,000 home has a monthly principal and interest payment of $1,056. But y our payment would be $970 if you refinanced your loan at 4%. The greatest immediate advantage of refinancing is that it allows cash-strapped borrowers to find room in their monthly budget. This could be useful if you anticipate an increase in your cost of living (for example, if you are expecting a baby) or if your income has reduced (from dropped hours or lost job).

  1. Pay off your mortgage sooner

By refinancing to a lower interest rate, you reduce your overall interest payments and, as a result, your overall mortgage sum. In many instances, borrowers wish to refinance in order to reduce the duration of their existing loan from 25 years to 15 years. Based on the rate of interest you qualify for, this may only have a minor impact on your monthly budget while helping you pay off your mortgage quicker. It is important to understand that it does not have to take 25 or 30 years to pay off a mortgage.

  1. Equity to fund purchases or lifestyle goals

Refinancing is frequently utilised to open up equity in your current property to finance purchases or lifestyle ambitions. Gaining access to equity, for example, could assist you in purchasing an investment property, renovating, or building, among other things. The amount of equity you may use varies by lender, which is why having a home loan specialist on your side can make all the difference when it comes to doing the paperwork.  When you refinance, you can also utilise some of the money from your home’s worth to pay for additional expenses: reinvesting that money in other properties or sending their children to college or something like in those lines.

  1. Debt consolidation

Homeowners frequently use the equity in their houses to finance large bills such as a home renovation or a child’s higher education. These homeowners may explain the refinancing by claiming that renovations increase the value of the home or that the interest rate on the mortgage loan is lower than the interest rate on borrowed money from some other source. Through the process of ‘debt consolidation,’ refinancing your house loan can provide an opportunity to consolidate your debt and perhaps reduce the overall interest you are paying on several debts. It entails consolidating many high-interest debts into a single lower-interest debt – which may be your home loan – and may result in a cheaper overall monthly repayment.

  1. Bring on better loan features

Several Kiwi homeowners may have mortgages that are inappropriate for their needs or have “bells and whistles” that are underutilised. Having the correct resources can save you a lot of time in the long term, so it is worth receiving professional advice on how to grasp the various loan options available and how you can benefit from them.

Get professional advice

Everyone’s circumstance is different, which is why it is important to seek expert assistance while looking for a refinancing solution that is right for you. Our mortgage broker is up to date on what is available in the market and the benefits of various loan options. So, if you are seeking a low-interest rate to cut your mortgage repayments, or if your financial position has changed and you are ready for an overall home loan health check, contact us and get your financial health back on track.