How to maximise your borrowing power without overstretching your budget

UNLOCK your financial potential with smart strategies to get the most out of your borrowing power while staying within your means.

When it comes to borrowing for a home or investment, maximising your borrowing power can help you secure a better deal. However, it is important to strike a balance between borrowing enough to meet your goals and ensuring you don’t overextend your finances. Here’s how you can make the most of your borrowing potential without putting your budget at risk.

Understand your borrowing power

Borrowing power is determined by several factors, including your income, expenses, credit history, and the type of loan you’re applying for. Lenders use these to assess how much you can afford to borrow without becoming financially strained. To maximise your borrowing power, start by understanding what lenders are looking for.

Improve your credit score

A higher credit score can lead to better loan terms, including a larger loan amount and lower interest rates. To boost your credit score:

* Pay your bills on time

* Reduce credit card debt

* Avoid opening new credit accounts

* Check your credit report for any errors.

Reduce your debt-to-income ratio

Your debt-to-income (DTI) ratio is a key factor in determining how much you can borrow. The lower your DTI, the more lenders are willing to lend you. To improve your DTI:

* Pay off high-interest debts

* Avoid taking on new loans before applying for a mortgage

* Consider consolidating debt to lower monthly payments.

Increase your deposit

A larger deposit means you need to borrow less, which in turn can improve your borrowing power. Aim for a deposit of at least 20 per cent to avoid paying for Lenders Mortgage Insurance (LMI), but even a smaller deposit can work in your favor if you can demonstrate strong financial habits.

Choose the right loan product

Different loan products offer different benefits. To maximise your borrowing power:

* Consider a variable rate loan for flexibility

* Look into interest-only loans if you’re planning to make larger repayments in the future

* Compare loans from multiple lenders to find the best terms for your situation.

Avoid overcommitting to a loan amount

While it may be tempting to borrow as much as possible, it’s important to ensure that your monthly repayments are manageable. Overstretching your budget can lead to financial stress and difficulty meeting other obligations. Be realistic about your ongoing living expenses and make sure you leave room in your budget for unexpected costs.

Factor in future changes

Consider how your financial situation might change in the future. Will you be getting a pay rise? Do you plan to start a family or make significant career changes? Factor these potential changes into your budget to ensure you can comfortably manage your loan repayments long term.

Lastly, seek advice

A mortgage broker or financial advisor can help you assess your borrowing power and recommend strategies tailored to your financial goals. head to ufinancial.com.au

//WITH DANIEL WALSH AND LEIGH DELEDIO FROM UFINANCIAL