Increasing borrowing power through higher income formulae

The brokers can comment on specifics re which lenders treat extra rental income more generously, as they do vary. However all extra income improves serviceability. As investors we generally hit a ceiling in 1 of 2 ways. We either hit the servicing ceiling or the deposit ceiling (we max out our dsr or our lvr) when either one stops you its frustrating. If you have deposit money or equity available but are told you can’t service then yes, the simple formula is that making more cashflow (either from high yielding property, or from a pay rise, second job, extra small business etc etc) is the solution. The banks have formulas for living costs so when you earn more $ above this the increased borrowing is quite dramatic per $ earned.

In the main lenders take 3% of the card limit as an expense each month so reducing the limit certainly increases your borrowing capacity.

Some lenders will ignore the C/c expense if you can show over a period of 2-3 months that the monthly expense has been paid within the due date.

Hope this helps.

Cheers

Yours in Finance

Heya,

Good question. Brokers spend every day playing with these calculators. A few observations:

Adding income is the most powerful way to improve your borrowing capacity – other techniques (e.g. interest only, reducing bad debt, switching lenders) generally only help to ‘maximise’ to get you as much as possible for a given income.

Increasing income increases what is possible. The overall effect on your borrowing capacity will depend partly on what type of income it is. As Benny mentioned, rental income is generally discounted by 80% (to take into account other property costs).

In terms of salary gains, a $10,000 gain for the average income earner, will potentially increase their borrowing capacity around $80,000. Some quick math, a $10,000 gross income gain is about a $6,300 gain in net income p.a. This can service (at banks assessment rates of around 7%), around $80,000 in additional debt.*

* assuming all other factors remain unchanged.

In terms of credit card debt, the ‘rough rule’ is your credit limit will reduce your borrowing power by about 5x its limit. Breaking it down, banks roughly assess credit card limits at 36% p.a . Therefore a $10,000 credit facility increases your ‘expenses’ by about $3,600 p.a. This is equivalent to around a $50,000 decrease in your borrowing capacity.

Hope this helps. :)

Cheers,
Redom

• This reply was modified 10 years ago by  Redom Syed. Reason: More precise numbers. :)

3 year fixed reduces banks buffer zone? The buffer zone banks use to assess is the same regardless of what type of rate you have.

When you go and apply for a loan, banks will generally do an income/expenses test and want to see that your income > expenses.

Generally, banks calculate the expense for the new home loan at 7%+, P&I repayments – even if you only pay 4.6% at I/O. However, for existing debts that you already have, some lenders assess this type of debt at what you actually pay (4.6% at I/O). Therefore, if you fix your EXISTING debt at a lower rate, and go to a different lender, your likely to have increased your borrowing capacity.

In terms of whether increasing your income or decreasing your expenses is more powerful as a method to increase your borrowing capacity – this will depend on the type of income/expense it is. For example, increasing your gross salary by $10000 isn’t as powerful (because its taxed) as decreasing your ‘discretionary expenses’ (e.g. foxtel, etc) by $10,000.

The reason why i say increasing income is very powerful – is one can reduce their expenses only so far, whereas income rises are potentially infinite.

Cheers,
Redom