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10 WAYS YOU COULD BE SABOTAGING YOUR BORROWING POWER

 

What kind of borrower are you? Responsible, reliable? While you may think of yourself as a good candidate for a loan, the banks may see you in a different light.

 

Here are 10 ways you may be sabotaging your borrowing power without even realising it.

 

1. KEEPING SEVERAL CREDIT CARDS WITH GENEROUS LIMITS

Say, you and your partner have three credit cards between you. They each have a limit of $10,000. Even if you never come close to maxing them out, the banks will still consider the debt potential right at your fingertips.

 

WHAT THIS SAYS TO THE BANKS:

I feel rely on my credit cards to fund my lifestyle and I need this $30,000 credit buffer.

 

WHAT YOU CAN DO TO FIX THIS:

Reduce your credit card limit to a realistic amount. If your bills only ever reach $2,000 each month, reduce your limit to $2,500 or $3,000.

 

Restrict yourself to having just one card. Not only will you save on annual fees each year, you will look like a more responsible borrower to the banks.

 

If you only use your card responsibly, keep statements to prove this.

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2. HAVING A BAD CREDIT SCORE

Do you have any unpaid bills or late payments lurking in your past? This could affect your credit score. Even if you are particularly diligent in paying bills on time, you may have accidently missed a payment here and there. Moving house and not notifying a change of address is a common mistake that can result in a very late or missed payment.

 

Under such a situation, your credit provider has the power to inform the credit reporting agencies and list a default against you.

 

WHAT THIS SAYS TO THE BANKS:

In the past, I have missed out on payments to my credit providers. If you lend me money, I may default on my loan.

 

WHAT YOU CAN DO TO FIX THIS:

Before approaching the banks for a loan, get a copy of your credit file and fix any black marks. Many people don’t even realise they have a problem until they see it for themselves.

 

However, it may be possible to fix your own credit file if there is an incorrect listing made against you.

 

Going on from this, make it a strict principle to always pay your bills on time. Set reminders, or consider setting up a direct debit from your credit card.

 

 

3. APPLYING FOR NEW PERSONAL OR UNSECURED LOANS

In the world of loans, there is good debt and there is bad debt. Debt that is not attached to an income producing asset is bad debt. Applying for a personal loan means you are willing to take on bad debt that you will have to pay back with interest.

WHAT THIS SAYS TO THE BANKS:

I am living beyond my means and am so desperate for money that I am willing to pay back a loan with high interest.

 

OR,

 

I have a large credit card debt that I have refinanced into a personal loan because the interest rate is lower.

 

OR,

 

I don’t have any ability to save.

 

WHAT YOU CAN DO TO FIX THIS:

 

Avoid getting personal loans and change your spending habits. If you are living beyond your means, we have a free budget planner to help you organise your finances.
Take on a mentality of delayed gratification and save for the future. Saying no to your inner child now may enable you to do the big things you want to do, like go on holiday or buy a property, a little later down the track.

 

If you already have existing personal loan or credit card debt, consolidating it into a loan with a lower interest rate, such as a home loan, may help you pay it back quicker and improve your chance of being approved for finance down the track.

4. CHANGING JOBS OR BECOMING SELF-EMPLOYED

It may be a welcome change for you, but changing jobs or going at it solo has the power to change the way the banks think of you.

 

A new job may come with a three-month probationary period. This means it is not as secure as a job that you have worked at for a few years.

 

Becoming self-employed means even less security. Even if you have several clients to begin with, there is no guarantee this will last. Many banks won’t consider lending to self-employed people unless they can prove their income by providing tax returns from at least two consecutive years of work.

 

WHAT THIS SAYS TO THE BANKS:

I could lose my job and income at any given moment and without warning. Or, if self-employed, my income could fluctuate severely throughout the course of my loan, causing me to default.

 

WHAT YOU CAN DO TO FIX THIS:

If you can time getting finance before changing jobs, then do it. Otherwise, you may have to wait a while before applying for a loan.

 

If you are considering self-employment, it is also advisable to secure your loan before saying goodbye to the boss.

 

If you have already made the transition, talking with a finance strategist can help you find out the best way to improve your borrowing power again.

5. STARTING A FAMILY OR GETTING MARRIED

Congratulations! These are happy times! However, many people don’t realise that getting married or starting a family will have an impact on their borrowing power.

In some cases, the impact will be minimal. If both of the people getting married are in steady, full-time employment, then this is hardly a liability.

 

If one of the partners is financially dependent on the other, however, then this means the working partner will have a greater level of expense against them. This may affect their borrowing power.

If having a baby, then that means another mouth to feed, school, clothe, etc. This will also add to your expenses.

 

If one partner is off work for a few years, then, this means less income for the family. Having less income and more expense equals less borrowing power.

 

On the other side of the coin, becoming separated or getting a divorce can also affect your borrowing power. If a married couple holds a home loan between them, and one decides to buy out the other, that person will now have to pay off the whole loan.

 

WHAT THIS SAYS TO THE BANKS:

I have to provide for myself and my whole family with just my income. I have less money to put into loan repayments.

 

WHAT YOU CAN DO TO FIX THIS:

Get married and have kids. It is more important and worthwhile than any amount of money.

 

When you do decide to tie the knot and start a family, find out what effect it will have on your borrowing power and financial situation in general so you can plan for the future.

 

Talking with a financial planner can help you devise a budget and savings strategy that will be in line with the needs of your family.

 

If you can prove to the bank that you take your finances seriously, through having a good credit history and savings strategy, then you will look like a responsible borrower.

6. SHOPPING AROUND FOR HOME LOANS

If you apply for loan after loan in the hope you get approved, you are doing yourself a disservice. Every time you apply for a loan it gets recorded on your credit file. If you don’t get approved for a loan, you are creating a bad record for yourself. This will mean lenders will be even less likely to approve your loan application than before.

WHAT THIS SAYS TO THE BANKS:

I want a loan but no lender will approve me because I don’t meet their lending criteria.

WHAT YOU CAN DO TO FIX THIS:

Don’t shop around. Instead, find a good mortgage broker who can assess your situation and needs and find the best lender to aim for. You will be less likely to get declined as the broker should have a good idea of each lender’s criteria and where you fit in.

7. CROSS-COLLATERALISING EXISTING PROPERTIES

If you already have a couple of properties and are looking to buy more, the value of these properties should help your borrowing power, right? Not necessarily. If you have tied together the properties through cross-collateralisation, they may be holding you back.
If one property has performed very well over the last couple of years, and the other property has not, the poorly performing one will be holding back the good one. This means your net available equity might be $0 as the bank assess the equity position on the pair.

 

If they aren’t tied together, you may be able to access equity from the good property, as the bank will assess it individually.

 

WHAT THIS SAYS TO THE BANKS:

My existing loans have two properties against them as collateral. It doesn’t matter that one has doubled in value, because the other hasn’t, so you shouldn’t let me take out equity on them.

 

WHAT YOU CAN DO TO FIX THIS:

Avoid cross-collateralising your properties unless there is a good reason for it.

 

Talking with a finance strategist at the start of your investing journey can help you avoid making costly mistakes and keep you on the right track to achieve your goals.

 

If you are already cross collateralised, a finance strategist can help you navigate the possible steps and costs involved in untying your properties.

8. REFINANCING TO REDUCE SIZE OF REPAYMENT

If you have refinanced your existing home loan in order to reduce the size of your repayments, although your serviceability may have improved, your borrowing power could be negatively affected.

 

How? Say, you had 20 years left on a 30-year loan, and you refinanced it so that you could pay it back over 30 years. Although your repayments would be smaller, you would add to the total size of your debt by increasing the number of years you are paying interest.

 

WHAT THIS SAYS TO THE BANKS:

I would rather pay smaller monthly repayments rather than pay the loan back quicker.

 

WHAT YOU CAN DO TO FIX THIS:

Before deciding to refinance, make sure you speak with a finance strategist about your long term goals.

 

They can help you weigh up whether this decision would benefit you now and in the future against any possible consequences to your borrowing power.

9. RELEASING EQUITY FOR THE WRONG REASONS

While some people release equity in order to take them to the next level of their investment journey, others may just release it for the sake of it. Sometimes a poor broker may encourage a borrower to tap into it without having a clear purpose of how the funds will help them financially.

 

If using equity to make more money, through buying or renovating to increase value, then an increased debt should be relative. In other words, if you are making money off the debt, then you are using it wisely.

 

If, however, you are using your equity to go on a holiday or take time off work, then you are increasing your debt without getting anything back from it. This may affect your borrowing power.

 

WHAT THIS SAYS TO THE BANKS:

I have made money off my property and I am willing to gamble it will go higher, so I can live of borrowed money in the meantime.

 

WHAT YOU CAN DO TO FIX THIS:

Only take out equity if you have a well-calculated plan on how it will take you closer to achieving your financial goals. Hold it in an offset account while you wait to put it to us, so that any interest is negated.

10. REFINANCING INTO A FIXED INTEREST RATE

While you may think rates are going up and you want to lock the current rate in, fixing rates may affect your borrowing power.

 

Once you’ve fixed the rate, you are locked in for that amount of time. Your lender may change its policy throughout this term, but you will still be bound to the contract you have signed.

 

This lack of flexibility means you may be unable to access equity if your property goes up in value, or vary your loan if you want to improve your cash flow.

 

WHAT THIS SAYS TO THE BANKS:

I may be a good borrower with a good credit history, secure income and a property that has gone up in value, but I have bound my loan to this contract. If I want to release equity or change to the variable rate, I may have to pay early exit fees.

WHAT YOU CAN DO TO FIX THIS:

Speaking with a finance strategist before fixing rates will help ensure you understand the consequences this decision may have on your ability to borrow more down the track.

 

If you have already fixed rates and come to regret it, a finance strategist will be able to help you figure out the cost of exiting before the end of term and whether or not it is worth doing.

 

 

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