How to increase your purchasing power
by Greg Carroll www.attitudefinance.com
Last month I discussed the impact of rising interest rates on serviceability. This month I will discuss some of the strategies you can adopt to maintain or improve your purchasing power in a rising market.
Each lender will have its own method of assessing your borrowing capacity. This can result in significant differences in your purchasing power. I will illustrate by way of example with our applicant who has an income of $70,000 pa and no other liabilities.
Based on the above her capacity to purchase an owner-occupied property would sit at $412,000. But if she had a credit card with a limit of $5,000. Her capacity would reduce to $394,000. Anyone who has a credit card knows lenders love sending letters offering to increase your limit. Let's say she accepts an offer to increase the limit to $10,000. The result? Her capacity is now reduced to $376,000.
Most lenders will include the full limit of the card to assess your capacity even if you clear the card each month. There are however, a hand full of lenders who will not include the card if you can demonstrate the closing balance is paid each month over 3 consecutive months.
Now let's assume our applicant already has a home with a loan of $200,000 and is planning an investment portfolio. This is an area where there can be significant differences between lenders as some will account for affect of negative gearing and some will not.
Let's say she wanted to buy a $300,000 property renting for $300 a week. The all up purchase costs would be approximately $315,000. Without including negative gearing in her capacity test the most she could borrow is $290,000. With negative gearing she could fund 100% of the costs.
Another factor that can extend your capacity is taking a loan with a longer term fixed rate. If our applicant wanted to purchase another similar investment property the maximum additional funding she could obtain on a variable rate would be $194,000. If she switched all her lending over to a longer term fixed rate this would increase to $308,000.
The key learning is to understand that different lenders can produce markedly different results and will affect your ability to acquire property. Next month I will discuss how these differences can be used to build your portfolio.
This information is provided in good faith but is not intended to be comprehensive and does not constitute advice. The above information is an example only and does not take into account market fluctuations or individuals specific circumstances. The ability to access the rates or repayments shown is dependent on individual circumstances and specific lenders policies. Attitude Finance accepts no responsibility or liability for anyone relying on this information.