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Why you still might not be able to borrow - even if you have a lot of equity.

It can happen that you can have a property with a lot of equity, or you have a very large deposit, but we tell you that your income isn’t sufficient to borrow the money you’d like. I get that this is frustrating but we need to separate the two factors.

There are three key characteristics of borrowing that the banks investigate:

  • Character (who are you, do you have good repayment history, do you have stable work etc, and we will disregard this factor for now),

  • Collateral (equity or deposit that you have)

  • and the third is Capacity.

Two Red Shoes

Capacity is the test of your ability to afford the ongoing repayments of the loan, and, this is tested with a buffer built in for future potential rate rises. Quite literally, adding up your current loan repayments, your living expenses and the necessaries of life, and your new repayments and deducted this figure from your after tax income.

This can be a harsh assessment when you realise that the banks will take their estimate of your living expenses based on models which may not match your own. They also build in the buffer we discussed, which for one bank looks like assessing the repayments at 8% pa. Regardless your opinion on this (and mine for that matter) it’s fact & APRA are watching.

The whole driver is about not putting you into a position of hardship where you could lose that equity or deposit that you have built up; not seeing you lose your home.

No point in telling me that you can afford your current repayments because you’re already making them; even if your cashflow is vastly improved by the new loan (and I know there are cases where this is absolutely true) with the exception of some expensive alternative documentation loans the lenders are still obliged to follow procedure allowing for the rate rises.

So what can you do, well reduce and remove any unnecessary borrowings, cut up and reduce the limit on your credit cards, strengthen your income. Another great idea would be to “test run” your proposed repayments and see how they actually fit into your lifestyle, particularly if you’re a first home buyer with minimal savings.

Western Weekender article

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