How to increase your borrowing power

This article is part of a fictional case study series following "Sarah", a typical first home buyer in Victoria. Read each article to follow "Sarah" through a variety of articles exploring issues related to buying a home.

With her savings goals sorted while she's renting, Sarah - a secondary school teacher - is starting to think ahead. How can she be ready when the time comes to actually buy a house?

One of the things she's thinking about is increasing her borrowing power. That seems like common sense, right? After all, the more money you have the more options to buy your dream house. But there are a few different ways to actually up your budget – and they might seem counter intuitive at first.

In Sarah's case, she wants to figure out if she can make sure her borrowing capacity is as large as it can be. So this is what she's doing:

She’s reduced her credit limits. Getting rid of credit cards helps, but even reducing limits can go a long way in helping you get the loan you’re looking for.
She’s saved up a 15% deposit. It’s not enough to get rid of Lenders Mortgage Insurance (LMI), but a bigger deposit is always better when it comes to your borrowing power. Sarah also has the option of asking her parents for assistance. The First Start Shared Equity Agreement is an ideal way for parents to help their child into the property market while protecting the interests of all parties.
She’s cleared out all her personal debts. No personal loans, no car loans – nothing. That means she has the capacity to borrow more.

And finally…

Sarah has reduced her living expenses. Banks want to know how much you’re spending on a regular basis, so writing out a budget is a big help there. Squeezing every penny you can from your regular pay can help you achieve the mortgage to get in to your very first home.

By combining even just a few of these strategies, you can make sure your borrowing power is as strong as it should be.

SARAH'S TAKEAWAY:

Sarah doesn't don't need to do much to help get into her dream home. She's going to reduce her credit limits by 75%, and start working hard on attacking her loans.