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Australian Financial & Mortgage Solutions (AFMS Group) has released new research detailing how everyday financial commitments can reduce borrowing power.
The Sydney-based brokerage tested borrower profiles across a range of scenarios to see how seemingly minor financial commitments can affect borrowing power.
For instance, AFMS Group found an unused $20,000 credit card limit can cut borrowing power by $100,000 for a median-income single earner.
This has a greater impact than a $650-a-month car loan, which reduces borrowing power by $85,000.
AFMS Group principal broker and founder Andrew Hadjidemetri said the research showed borrowing power was about more than salary and deposit.
“Things like an unused credit card, car loan or other commitments can significantly affect what a lender will offer.
“I’d encourage buyers to understand their borrowing position before they start looking at properties, rather than finding a home first and trying to make the numbers work afterwards. It is also important to remember that your maximum borrowing capacity is not necessarily what you should spend.”
Hadjidemetri also noted that some factors affecting borrowing power can be changed, whether by reducing a commitment, reviewing credit card limits or considering different lenders and deposit options.
“A mortgage broker can help buyers understand the full picture and compare their options,” he said.
“At AFMS Group, we compare more than 30 lenders to help buyers understand what they can realistically borrow and what options may work for their circumstances.”
Reframing the conversation
For brokers, AFMS Group recommended advising clients to consider the following actions.
Closing or reducing unused credit card limits could help increase borrowing power, with a $20,000 limit costing the median earner $100,000 in borrowing capacity in the report.
Borrowers should also review car and personal loans, with a $650-a-month car loan reducing borrowing power by $85,000. Clearing a loan close to being paid out could have a greater impact than waiting for rates to move.
Borrowers should understand how lenders assess HELP (HECS) debt, as the impact can vary depending on income and lender policy. Paying it out is not always the best use of savings.
Dependants should also be factored into borrowing calculations early, with two dependants reducing borrowing power by $120,000 for the median earner in the report.
AFMS Group also recommended checking borrowing power before starting a property search, as the same borrower can receive different assessments from different lenders.
[Related: Brokers face double pressure as rate hike looms]
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