There are a number of pitfalls home buyers get into which impact their borrowing power.
Whilst the decisions are made unknowingly, the choice on any of these can impact your desire to purchase a home or build a property portfolio.
Make sure you work with your finance strategist to determine your finance strategy, determine what your current borrowing is and how you can improve the same by eliminating one or more of the following 10 reasons.
1. Credit Card Limits
The higher the credit card limit the more monthly outgoing that is reported on servicing calculators.
For a $10,000 credit card, the minimum repayments of 3% i.e. $300 per month
For a $20,000 credit card, the minimum repayments of 3% i.e. $600 per month
2. Personal or Car Loans with monthly repayments
Depending on the monthly repayments, the bottom line surplus can impact what you are able to borrow for your home purchase
3. Outstanding HECS / HELP Debt
HECS / HELP debt, similar to personal and car loans is a regular outgoing from your income and can impact your borrowing for a home.
4. Unpaid Leave
Unpaid leave reduces the gross base income per annum and therefore impacting the overall borrowing for a home
5. Voluntary Super Contributions
Voluntary super contributions reduce the gross base income per annum and therefore impacting the overall borrowing for a home. Also note that if you have owner occupier debt, you are better off reducing this debt versus making additional super contributions. You may be able to use these for servicing purposes where an employer letter can be organised advising that the voluntary contributions can be stopped at any time. We suggest you seek financial advice tailored to your circumstances.
6. Purchased Leave or Car Leases before tax which reduces your overall income
Any before tax purchases of leave or vehicles (or anything else e.g. shares etc) reduce your overall income therefore reducing your borrowing power
7. Moving lender to lender to get the best rate
Often people think moving lender to lender for a reduced rate to enable savings is a great idea. Whilst savings may be worth it, take into account the costs involved in new application and exit fees. Further, take into account the detrimental effects on your credit file with a number of credit hits in short succession. High number of credit hits impact your credit score, make you look desperate for funding and can be a reason for the application to be rejected
8. Deductions to reduce taxable income shown on the tax returns – self employed
Self Employed business owners may reduce tax through claiming losses in the business, therefore reducing their taxable income and profits. The banks look at your income and profits for the business to determine the borrowing power. If there is little income and profits to show, you are unlikely to be able to borrow for your purchase. Saving tax is not a strategy and can work against the borrower
9. Self-management of rental properties
Be wary of lender policy when it comes to self-managing your rental properties. Lender assessors can reject your ability to use rental income to service a home loan.
10. Frequent change in jobs and residential addresses
Frequent change in jobs and residential addresses has the potential to ‘toast’ your credit file, reducing your credit score and therefore building grounds for potential finance decline due to the lack of stability.
Make sure you take the above into consideration when preparing to finance your home or in particular if you are looking to build a property portfolio. Whilst some of the above points may offer you savings or a better life style, there is potential for any of these choices to impact your financial goals and how quickly you move in the direction of wealth creation.
Any questions, or if you are looking to review your situation, reach out to the Property Twins on 1300 97 60 60 or [email protected]
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Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice
