Strategies to Increase Your Lending Capacity And Overcome Borrowing Limits

Dilleen Property Group 2023

Reaching your borrowing limit can be a frustrating obstacle when you're eager to expand your property portfolio. However, there are several strategies you can use to overcome this challenge and increase your lending capacity. In this blog, we will explore ways to expand borrowing beyond traditional lenders, address considerations specific to self-employed individuals, manage expenditure and liability, and explore contributing factors such as HECS debt, increased rent, and overall income.

Exploring 2nd And 3rd Tier Lenders

When you've reached your borrowing limit with mainstream banks, it's time to consider alternative lenders. Second and third-tier lenders often have more flexible lending criteria and may be more open to working with borrowers who have reached their limits. Building relationships with these lenders can provide access to additional financing options and potentially increase your borrowing capacity.

Self-Employed Consideration

Self-employed individuals may face different challenges when it comes to lending. Traditional lenders often scrutinise self-employed borrowers more closely, requiring extensive documentation and proof of income stability. To increase your lending capacity, it's crucial to maintain detailed records of your business income, profits, and tax returns. Working with lenders who specialise in self-employed borrowers can also provide more tailored financing solutions.

Managing Expenditure and Liability

When seeking to increase your lending capacity, it's essential to assess and manage your expenditure and liability. This includes considering the impact of credit cards, car loans, personal loans, and services like Afterpay.

Credit card debt can significantly impact your borrowing capacity. Lenders take into account the outstanding balances and minimum monthly repayments when evaluating your financial position. To improve your borrowing potential, it is advisable to minimise credit card usage and pay off outstanding balances whenever possible. If you own multiple credit cards, it is beneficial to remove a few of those to increase your borrowing capacity.

Car loans represent an additional monthly financial obligation that lenders consider when assessing your borrowing capacity. If you have an existing car loan, consider paying it off early. By reducing or eliminating this debt, you can improve your overall financial position and enhance your ability to secure additional lending.

Similar to car loans, personal loans impact your borrowing capacity as they add to your monthly financial commitments. By managing and reducing personal loan debt, you can free up financial resources and increase your ability to borrow for real estate investments.

Alternative payment services like Afterpay may seem convenient, but they can impact your borrowing capacity. While these services typically do not reflect as traditional debt on credit reports, they still appear on your bank statements for lenders to assess. Limiting your use of such services or paying off outstanding balances promptly can demonstrate responsible financial behaviour and potentially improve your borrowing capacity.

Considering HECS Debt

For individuals with Higher Education Contribution Scheme (HECS) debt, lenders factor in the repayments as part of your monthly expenses. However, this depends on where you are in your property portfolio, if you are only on your first property, your HECS debt does not make too much of a difference. However, if you own multiple properties, the lender will be calculating your HECS on top of your rental income and personal income. Hence it’s best to pay off your HECS debt to secure higher lending capacity once you’ve reached further into your property portfolio.

Increased Rent and Living Expenditure

Increased rent and high living expenditure can significantly impact your borrowing capacity, especially if your salary remains the same. When your expenses outweigh your income, lenders may view your ability to repay loans as limited. To mitigate this situation, consider exploring alternative options to reduce living expenses. This may involve relocating to a more affordable location, downsizing, or even temporarily living with family to decrease expenditure. By aligning your living costs with your income, you can improve your debt-to-income ratio and enhance your borrowing potential.

Employment Type

The type of employment you have can also affect your borrowing capacity. Lenders typically evaluate the stability and consistency of income when assessing loan applications. Full-time employment provides a higher level of security for lenders, as they typically consider 100% of your income when calculating borrowing capacity. However, if you work in a casual or part-time basis, lenders may only consider a portion of your income, typically around 80%. It's important to be aware of this distinction and understand how it may impact your borrowing capacity.

If you are in casual or part-time employment and looking to increase your borrowing capacity, you may consider strategies such as securing additional income sources or transitioning to full-time employment. Demonstrating a stable and consistent income stream can positively influence lenders' perception of your ability to repay loans and improve your borrowing capacity.

Overcoming borrowing limits requires a strategic approach and consideration of various factors. Exploring lending options with 2nd and 3rd tier lenders can open new avenues for financing. Self-employed individuals should be prepared with comprehensive documentation to demonstrate income stability. Careful management of expenditure and liability is also crucial. Reducing living expenses, considering relocation or living arrangements, and potentially exploring opportunities to increase your income can significantly enhance your ability to secure additional financing. If you’re looking to obtain finance or need help with your finance, you can speak to our broker Justin Picker here. Additionally, if you’re looking to start your property investing journey, feel free to contact us here to learn more about our services and investment strategy.

Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.