Ramp up your borrowing capacity

How reducing your credit card limit could ramp up your borrowing power!

Are you looking to enter the property market or upgrade your existing home but it seems just out of your reach?

Many of our clients are keen to understand what influences their borrowing power and how they can improve their borrowing capacity to be a step closer to their next home or investment property. Did you know that your credit card limit directly impacts the amount you can borrow? With a simple change it can also be one of the quickest ways to increase your borrowing capacity!

Lenders don’t just look at the outstanding balance of your credit cards and your minimum monthly repayments when assessing your loan application. In fact they look at what your total repayments would be if you used the credit card limit in full even though it may not be utilised. The lenders’ rationale is that you have the ability to utilise the limit, so they must take this into account when determining your repayment serviceability.

Therefore if you have significant credit card limits that are not being used you could be detrimentally impacting your borrowing capacity.

How much could this impact your borrowing capacity if you are trying to purchase a property?

Let’s look at the following scenario.

Credit card

Card 1 – Current Balance $2,500 – Card Limit $10,000 – Min. monthly repayment on balance $75.00 – Min. monthly repayment on credit limit $300.00

Card 2 –  Current Balance $2,000 – Card Limit $7,500 – Min. monthly repayment on balance $60.00 – Min. monthly repayment on credit limit $225.00

Card 3 –  Current Balance $4,500 – Card Limit $17,500 – Min. monthly repayment on balance $135.00 – Min. monthly repayment on credit limit $525.00

When assessing your loan the lender calculates your monthly financial commitment on the maximum credit limit of $17,500 (equating to $525 per month) NOT the current balance of $4,500 (equating to only $135 per month). The difference of $390 per month could be used
as repayments towards your new property loan. This $390 per month could equate to an additional borrowing capacity of approximately $63,500 (based upon a 25 year loan at 5.5% pa interest rate with P & I repayments).

Importantly, interest free cards will also reduce your borrowing power. Even though many cards are interest free the lender will assume a monthly commitment against the limit of the card (generally at approximately 2.5% per month) to allow for the amortisation of the principal.

The impact of reducing your credit card limit

For every $1,000 that you reduce your credit card limit, your monthly available income will be increased by between $30 and $50. This generally equates to an increase in borrowing capacity of approximately $4,100 (based upon a 25 year loan at 5.5% interest rate).

What can you do?

  • Cancel unnecessary credit cards and store cards to consolidate your credit card debt. This will reduce your monthly financial commitments and free up your income for other repayments.
    Do you really need more than one credit card if it is directly impacting your borrowing capacity?
  • Reduce the limit of your cards to the minimum practical
    amount for your personal situation.

Before you do anything call the office today to determine if reducing your credit limit will boost you borrowing power. We will assess your personal situation and determine the best way to maximise your borrowing capacity.

First Home Buyer? Step through to your new home…

Buying your first home is an exciting time. It can also seem complex and confusing. First home buyers (FHBs) often find themselves dealing with financial and legal processes outside their experience to date.

Regardless of whether your first foray into property is a small bolthole that removes you from the rental treadmill, an investment property or a family home, the process to purchase is much the same.

Before you take the leap into property you should have done your homework and created a budget, minimised credit card usage, been saving hard, paid your bills on time and researched the property market.

So what other steps will you need to tick off your list when you leap off the precipice into the world of property ownership?

  • Your deposit

Most FHBs find it difficult to raise the full 20% deposit to avoid lender’s mortgage insurance (LMI). LMI often allows FHBs to get into property sooner – most lenders will allow as little as 5% deposit. If you wait to save the full 20% prices could go up! Perhaps your parents can provide supporting security – such as a family guarantee – to eliminate the need for LMI?

  • First Home Owner Grant (FHOG)

The FHOG varies from state to state – it may only apply to building or purchasing new homes, up to a price limit and have rules around how long you must live in the home. If you are eligible for the FHOG you should take advantage of it. Check with your relevant state authority.

  • Stamp duty

Stamp duty is a state government tax on the transfer of land or sale of property. It also differs across states. It could be either a set rate or a percentage of the total sale. Some states offer concessions or bonuses under certain conditions. Check the government website in your state.

  • Know your borrowing capacity

Obtain an estimate of your borrowing capacity and monthly repayments. As your mortgage broker we can assess your situation and suggest options to suit your needs from a wide range of loan products and lenders AND there is no charge to you upfront. Your deposit, FHOG eligibility and cost estimates will be taken into account when calculating your borrowing capacity.

Avoid shopping around for home loans with multiple lenders as each enquiry will appear on your credit report!

  • Home loan application

Great. You’ve found a suitable loan! The next step is pre-approval. Why should you have this? When you start looking for a property, pre-approval for your loan provides a clear guideline on how much you can spend and allows you to act quickly. Be aware your pre-approval will have an expiry date. You still need formal approval of the loan to proceed to a sale.

  • Finding a property

Don’t rush in. Extensive research and property inspections are crucial to familiarise yourself with what is available in your price range.

• Sign up to websites for daily alerts.

• Contact agents in your chosen suburb(s) and provide a wish list and price range. FIRST HOME BUYER? Step through to your new home…

• Let them know you’re ready to go so they know you’re not a tyre kicker.

• Know your purchase limit and stick to it!

Use our ‘property inspection checklist’ at EVERY inspection to tick off the features of each property. Take photos as well – use these to make comparisons. It’s often difficult to remember when you’ve looked at a lot of properties!

  • Conveyancer or solicitor

You should choose a solicitor or conveyancer at the same time you start looking for a property. With loan pre-approval and your legal matters sorted you will be ready to act and make an offer when that right property comes along!

Also consider other costs such as:

• Insurance – many lenders insist you have home insurance – and you SHOULD.

• Strata levies for properties under strata title, eg apartments.

• Pest and building inspections.

• If buying an investment property you will require a quantity surveyor’s report for future tax depreciation purposes. Seek advice from a finance specialist.

Call us TODAY to let us help you determine your borrowing capacity.

How will I support my parents if their money runs out?

Baby boomers are the first generation in history to face a new ‘third age’ with an unprecedented expectation of a decade or two of relatively healthy life after their retirement.

But while boomers are actively planning for longer retirement years, many are also part of the ‘sandwich generation’ who have elderly parents without super and adult children still seeking help. As a result they are wrestling with some tough decisions.

Take a look at our case study below… 

Ann’s situation is one that arises more and more frequently. While ageing parents are also enjoying longevity many will find themselves unable to make their money last as long as they do.

Should their children help them? Quite often, when their adult children can, they do. But not every situation is so easily solved and not every sibling is on the same page. It can be an emotional minefield of guilt, jealousy and recriminations and raises the moral question of what is ‘right’.

It is a shock to some that their parents didn’t plan better (or do ANY planning for that matter). At a time in their lives when baby boomers might expect to be enjoying financial security and leisure time they are likely to have increased demands on their financial and other resources. This can give rise to some monumental family conflicts.

It also raises the question: ‘what does this mean for future generations?’

Here are some issues we all need to think about:

• Become familiar with the affairs of aged parents, ie anything that pertains to their finances and care preferences. If you know what you are dealing with you can plan for it.
• Make sure necessary legal documents are in place, such as a health care directive and a power of attorney.
• Research the entitlements, benefits and programs available through government agencies (Centrelink, state government, local councils) or nonprofit organisations. Research has found people may be missing out on more than $600 million in assistance largely due to a lack of awareness.
• Explore a reverse mortgage for your parents. Can they access some of the equity in their property? Speak to your finance specialist to explore this option.
• Ensure child care and aged care is planned well in advance of when it will be needed.
• Teach young adults about financial responsibilities and wealth creation. You are never too young to start thinking about your future.
• Seek professional assistance to help you plan your long term financial strategy and establish an estate plan.

CASE STUDY

Three times a week Ann Johnson makes the one hour drive from her home to look after her 85 year old parents. Her mother has dementia and now lives in an assisted living facility, but Ann drops in to visit and monitor her care. Ann’s father still lives at home and is relatively fit, but he still needs rides to doctors’ appointments as well as help with the shopping and other errands.
With the expense of her mother in care, Ann and her siblings all contribute a regular amount of money to help their parents financially as well as sharing care giving duties whenever possible. Without the mutual support system, things would be tough.

To complicate matters, Ann’s daughter Sarah, a classical flutist with a graduate degree, moved back home a few years ago when she couldn’t find work in her field. Sarah eventually retrained as a nurse, married and recently moved to an area nearby. She has just had her first child and is looking to return to work in the next few months – with assistance from Ann to help with childminding. Ann is an unwitting member of one of the fastest growing groups: the so-called Sandwich Generation.

Memory Loss and your money…Thinking Ahead

There are over 400,000 Australians currently living with dementia and that figure is expected to increase to over half a million by 20251. Another 26,000 are living with younger onset dementia – a figure that is also predicted to rise over time.

While there are obvious costs to society of care and disability support, an often less talked about effect is the possible financial ramifications for both the dementia patient and their family.

Anyone caring for an aged parent with dementia will no doubt be aware their parent is of a generation that is often secretive and guarded when it comes to matters of their own finances. This mindset doesn’t help matters.

We often share tips with our readers about planning for the future – no matter WHAT your current age. But as we age, having plans in place will not only help ensure our wishes are followed it will also relieve some of the stress on the loved ones left to make financial decisions for us.

How can your money be affected?
Initially it may be that everyday tasks become more challenging and confusing such as keeping track of spending, doing the banking, checking bank statements or paying bills.

As dementia progresses the patient may become incapable of managing their financial affairs or develop paranoia and suspicion around offers of assistance. Without prior planning or a caring support system those affected could also be more vulnerable to financial abuse by people who may try to take advantage of their situation.

Thinking Ahead
Putting plans in place to protect your money should the worst happen involves two key areas – simplifying your finances and deciding who will manage your finances.

Simplifying your finances
It will be easier for both you and your loved ones to stay in control of your finances if you simplify them in several areas. Some useful tips are:
• Consolidate multiple transaction accounts into one account.
• Reduce the number of your credit and store cards.
• Do you really need that cheque account? If not, close it.
• Make a list of regular bills and how often they recur, eg phone (monthly), electricity (quarterly), rates (annually). Better still, consider setting up direct debits for regular bills.
• As you pay each bill, mark it as paid and file it away.

Who will manage your finances?
An enduring power of attorney allows you to choose who will manage your affairs if there comes a time when you are unable to do so yourself – you should speak to your solicitor to arrange this. You can appoint one or two people but most importantly they should understand their responsibilities and legal obligations and YOU should feel confident they will act in your best interests. Without this in place a court may need to appoint a person to take care of you.

Sort out important documents!
Take the time to collate all of your
important documents, including:

Personal
 birth certificate
 marriage certificate
 will (ensure it is up to date)
 enduring power of attorney or guardian details
 tax file number
 personal insurance policies
 Centrelink reference numbers
 account passwords, including social media accounts
Property
 property deeds
 property insurance details
Finances
 bank account details
 list of direct debits
 mortgage documents
 superannuation details
 investment documents
 other loan details
 funeral investments or loans
Health
 Medicare number
 medical insurance details
 pensioner concession card

What if you DON’T plan?

With no plan in place and a lack of knowledge of our financial situation, families often struggle to sort through our finances  – at an already difficult time. Nobody ever WANTS to leave their family in that situation.

None of us knows what life will throw at us and when, but life’s curve balls COULD be easier to manage if we have taken steps to protect ourselves AND our money.