You may know what you think you can afford in repayments but how does this compare to what lenders think you can afford?
Serviceability calculators are what lenders use to determine what you can afford based on your income and commitments. It factors in an estimate of living expenses, a buffer on the rate to ensure that you can still afford the loan if interest rates increase by around 2%.
If a lender comes back to you to say that the loan amount you are seeking doesn’t “service” it means that based on their calculations it is falling short. There are a couple of things that are factored in that can be changed to allow you to borrow more. These are listed below.
Personal Loans, Credit Cards and Other Commitments
The amount you can borrow is impacted by having commitments like credit cards and personal loans.
For credit cards, even if you pay off the amount owing in full each month or don’t even use the card, lenders will use the maximum spending limit when making calculations. If you don’t need the limit you have, you can get it reduced or even cancel the card.
Interest free deals can seem really attractive. Even if you have the funds to pay the balance as soon as the interest free time expires, lenders still bring this in as a commitment just like a credit card. When you have paid it out, ensure that you close it down. Most interest free deals have a limit and you are encouraged to keep it open for your next interest free purchase. The limit will be included in your commitments just like a credit card that has nothing owing.
Personal loan repayments are an ongoing commitment that will be factored in. Having these paid out prior to purchasing is ideal but only if it doesn’t deplete all the funds you have saved to go towards the purchase.
HEC/HELP debts are deducted from your pay and you often don’t think of it as a commitment. The income a lender uses will be reduced by the contribution that you make towards these. If you don’t have much left to pay then it may be worthwhile just paying out the outstanding balance.
Other expenses that aren’t included in normal living allowances will also be factored in, like the cost to run a second car, childcare and school fees, Foxtel and gym memberships.
Apart from the above, there are other things that lenders look at when assessing your application.
Having a clear credit history with no defaults or arrears listed is paramount. Australia is moving to a positive credit reporting system so soon lenders will be able to view repayment history on any commitment you have going back 18 months.
Do your homework before you apply for credit. Having multiple enquiries from lots of credit providers can reduce your credit score and can impact your ability to get a loan. Check your own credit report to ensure that there is nothing there that you are unaware of.
Steady employment history. If you are still under probation or have just changed careers you could have issues. Have a chat to your lender about potential solutions.
Where there are issues there typically are solutions, so talk to your lender about them to seek out alternatives.