Maximise your borrowing power
When it comes to getting a home loan, it’s helpful to think like a lender. Each bank has a unique home policy and ways they assess risk so it’s important to have lots of different banks to choose from to find the right one that will work with you.
Banks are pretty risk-averse.
When a bank is deciding whether or not they want to give you your money, all they really care about is: Can you pay now, can you pay later, and do you have proof?
The banks look at things like your employment history, consistency of your income, other debts you might have, and savings to assess if they will lend you the money or not.
Every lender uses the same fundamental criteria when looking at your loan application, and this includes what they call the 5Cs of credit.
The Five Cs of Credit
The Five Cs of credit is the most basic test of the creditworthiness of potential home buyers. Here are its core components:
- ☑️ Character: This refers to your reputation, or track record, and ability to repay debts. This is usually judged by your credit report, which contains information on how much you have previously borrowed and if you have repaid your previous loans or credit cards on time.
- ☑️ Capacity: This measures your ability to repay the loan based on your current income, and also around your job stability—specifically how long you’ve been in your current job or industry. Some lenders like to see you have been in a particular job for at least 2 years, while others are happy to lend to you as soon as you have your first payslip.
- ☑️ Capital: Capital refers to your contribution or the deposit you are providing towards the purchase or refinance. In general, the more capital, or deposit you contribute, the lower the risk the bank sees you as. This is why borrowers with less than 20% deposit are seen as a slightly higher risk, and so the banks will obtain lenders mortgage insurance to protect themselves.
- ☑️ Collateral: Collateral is what secures the loan. In the case of a home loan, this is your property. Again, different lenders have different criteria, for example, some love lending on smaller units, some will not lend on units at all. If you aren’t sure about a specific property, you can chat to our brokers to double check.
- ☑️ Conditions: Conditions means the particulars of the loan, like interest rate, loan amount, loan term (which is generally 25 or 30 years in Australia) and loan purpose.. In recent times owner-occupied loans (a home loan to buy a house for you to live in) are more desirable for lenders compared to an investment property. This means you can get a larger home loan discount for an owner-occupied home.
Tip: If you are thinking about switching jobs in the future, the bank will ask about gaps in your employment history or a reduction in income over the past few years. If you’re currently in the loan application process, it’s best not to change jobs if you can avoid it as it could impact your ability to get financing even after you’ve been approved.
Your borrowing power can vary a lot between different lenders, but switching banks isn’t the only way you can increase this amount.
You can also do it by:
- 1. Improving your credit rating. If you have a good credit score and very few recent credit inquiries, banks are going to be more willing to lend you money than if you have unpaid defaults or other credit issues in the past.
- 2. Removing defaults. If you do have defaults, make sure you have paid them and even try contacting the company to see if they can remove the default once it has been repaid. Otherwise, just make sure you get into the habit of paying off your credit cards on time.
- 3. Ditching your credit cards. Look at your spending patterns along with the credit limit available and try to reduce the limit, or even close the account if possible. A credit card limit of $10,000 can reduce your borrowing power by up to $50,000
- 4. Pay off personal loans. If you have car loans, personal loans, a HECS-HELP debt, zipPay or other loans, this can really affect your borrowing power. If possible, aim to pay off any loans you can before buying so you can maximise your borrowing potential.
- 5. Try to get a pay rise. This option is clearly not possible in all circumstances. But a pay rise as small as $5,000 could be all you need to get that dream home—it can’t hurt to ask.
A home loan is something you are committing to for years, if not decades. The average loan term is 20 to 25 years, so the banks want to make sure that you will be able to continue to make payments in the future.
To work this out, the banks will look to see if your income has been stable and constant over the past one to two years and if it’s likely to continue. They will typically want to see some documentation of your income history, like group certificates and payslips.
If your income is variable, for example, if you are self-employed or paid a commission, you may need to submit some extra documentation and be prepared for some banks to be slightly conservative in their income calculations. Also, keep in mind that not all income is considered equal. For example, banks will typically only count 75-80% of rental income, as it is considered riskier than employment income.
I will show you how to get a more accurate idea of what you can afford and what your repayments will be, but as an estimate, the banks will lend you around five to six times your gross annual salary.
This is your annual salary before tax, not including superannuation or any other bonuses.
Are Different Types of Jobs More Preferred Than Others By the Banks?
The acceptable job statuses of preferred borrowers are as follows:
- ☑️ Permanent Employment (full time or part-time) – This is what most people would know as a regular job, sometimes referred to as PAYG, or pay as you go employment. In this case, you are directly employed to work for an employer, and also directly paid by that employer. This is the most preferred type of employment by the banks, and in some cases has no minimum employment period to get a home loan, just a single payslip.
- ☑️ Contract employment (full time or part time)—The borrower must be working for at least a year with a current employer, or have a minimum of two-year continuous experience in the same industry. If a person is on a probation period, the strength of their loan application and financial position matters a lot.
- ☑️ Casual income—He or she must have at least one year of experience in the current employment to be able to qualify for a loan. If casual employment is their only source of income, the application assessment is done on a merit basis, keeping in mind the borrower’s financial position.
- ☑️ Self-employed—In this case, a person must have been doing the same business for at least two financial years. The lenders may also consider the application if a borrower only has one year of experience in their current business, but at least two years of experience in previous employment within a similar business. However, the overall strength of the application will be taken into consideration for that matter.
- ☑️ Second job—A person must have at least one year of experience in their current job.
Will the Bank Accept Overtime, Shift Allowance or Any Other Types of Unusual Income?
If the duration of employment is met, 100% of the borrower’s income will be accepted for review by the lender. Below are the income types that might be fully accepted—subject to certain conditions.
- ✅ Overtime
- ✅ Shift allowance
- ✅ Rental income
- ✅ Child support
- ✅ Fully maintained company car
- ✅ Car allowance