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What a
Month!
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It is no secret that May was a confusing
month (financially) for most. On one hand the Reserve Bank increased
interest rates and on the other, income tax cuts were announced. On
top of that, many States and Territories revisited their stamp duty
charges on property prices. So where does this leave us as we ease
into June and the challenges of mid-year? A little better off
perhaps? However I suspect that with the rising costs of petrol and
food it might be more a case of ‘about even’.
In essence the
Housing Industry Association's Managing Director, Dr Ron Silberberg
calculated that low- to middle-income earners stand to gain up to
$80 per month in additional disposable income from tax cuts. This
translates to an additional $40,000 borrowing capacity for most
Australians. However rate rises will lead to extra repayments of $32
per month on an average mortgage.
Confused yet?
An
often forgotten additional sting in interest rate rises is the
increase in interest on your personal loan and credit cards.
Combined, this can really have an impact on your monthly budget.
While the tax cuts may have eased the pain of the rate rise, in
reality it is your approach to saving that will determine if the tax
cuts benefit you. As Commonwealth Bank Chief Economist, Michael
Blythe observed recently, "Normally tax cuts are spent three times -
when they're announced, when people receive them and once more just
to make sure”.
So let me be blunt, it is not a saving if you
use it to increase your spending.
To elaborate on one of
Robert Allen’s* theories; it is not about driving around looking for
the cheapest petrol and saving 2 cents a litre, it is about what you
do with that $1 saving. If like most, you do nothing, then you
haven’t saved money, you have just kept it in your ‘pile of money to
spend’. The difference between those who save and those who don’t,
is that those who save actually take that $1 out of their wallet and
put it into a piggy bank.
For many years we have had a
policy in my home that every $2 coin we receive (from any
transaction) is placed in a tin…and I mean every $2. We were both
shocked and delighted the first time we opened it, after only a few
weeks, to find we had accumulated $150. These days we come up with a
list of luxuries to spend this ‘windfall’ on each year; the first
purchase was a cordless drill to help with renovations, the next a
BBQ, and so on. So what are you waiting for? Start saving your
savings; don’t just keep them in your wallet or back pocket, you’ll
only spend them, maybe start a “$2 tin”. My parents have also
adopted this habit and were thrilled to find nearly $800 after 6
months – a great start for their holiday.
I hope you enjoy
this month’s article: Part 2 of How to Improve Your Borrowing
Capacity. Don’t forget, as a valued subscriber you also get
exclusive access to the InvestKit section of the newsletter
including helpful checklists for house hunting as well as a great
budget tracking and goal setting spreadsheet. Go to the members
section by copying
http://www.investorschoice.com.au/investKit/investKit.html into your
Internet Address window or click on the link at the bottom of the
next article.
Until next month, may your investment options
be many and your choices sound!
Jane
*
Books by Robert Allen: Nothing Down for the 2000s: Dynamic New
Wealth Strategies in Real Estate; Creating Wealth: Retire in Ten
Years Using Allen's Seven Principles of Wealth; and Multiple Streams
of Income: How to Generate a Lifetime of Unlimited Wealth)
| Part 2 -
Improving your borrowing capacity is easy when you know
how
Welcome to Part 2 of the special article on Borrowing
Capacity, and some more tips on maximising your chances of a
successful outcome when applying for finance. Last month I
recommended you review your savings history and factor in
opportunity costs. This month we’re going to take a look at
earnings and expenses as well as ‘borrowing capacity’
calculators. |
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Evaluate how much you earn vs how much you owe
Increasingly from a lender’s perspective it is
important that a potential borrower demonstrates a good
overall savings history. The introduction of 95%, 97%, 100%
and even higher loans has allowed those able to demonstrate
they can service the loan, to borrow a higher portion of the
value of the property. However if you are considering
purchasing property with only a minimal deposit, be aware that
you will generally have to demonstrate stable employment and
genuine savings of 3-5% over 3-6 months.
Regardless of
the level of your deposit, the most significant thing lenders
will consider is the risk to them. Hence when assessing
borrowing capacity, lenders will review your job stability;
the stability in your living circumstances, ie how often you
move home; and most importantly, how much you earn vs how much
you owe.
Borrowing capacity is calculated by looking
at your existing income, your potential income if buying an
investment property, and your current expenses.
Existing income
You will be required to
provide 3-6 months of payslips to prove your earnings. You
will also be asked to provide contact details for your
employer so that the lender can confirm your employment
duration and earnings.
Potential income
Each lender assesses the ‘potential rental income’
component differently. Some will only allow 60% of the income
to be considered but commonly they use 75%. One lender however
is known to consider 100% of the income if you purchase a
Defence Housing Australia property (due to the guaranteed
rental for 9-12 years backed by the Australian government).
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Current Expenses
Each lender has their own
formula for calculating how much it costs you to live; this is
their policy and it’s not negotiable. For those with kids for
example, it can be handy knowing which lender will show the
smaller cost for those kids, thus increasing your potential
borrowing capacity.
Credit cards are also a major
factor considered by lenders. Every $5000 worth of limit (not
balance) on your credit card, means on average $20,000 less
that you will be able to borrow.
For example, if your
circumstances meant you would normally be eligible to borrow
$200,000 but you have a credit card with a zero balance and a
limit of $10,000 this could reduce your borrowing capacity to
$160,000. I recommend those of you who keep a credit card for
the ‘just-in-case’ circumstance review how much of a limit you
really need.
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| Using a ‘Borrowing Capacity Calculator’
If you are buying property it is a good idea to get
pre-approval first. These days, lenders have made it easy for
you to access or download a borrowing capacity calculator via
their website. Be aware though that calculating your borrowing
capacity using one of these calculators does not mean you
automatically qualify for that amount.
For instance,
you may calculate that you could borrow $400,000 on your
current income and expenses. However if you have less than a
20% deposit, the lender’s calculator is often overridden by
the mortgage insurer’s calculator which could assess you as if
the loan interest rate was over 9%. This is well over the
actual rate you would be paying and more importantly, what the
lender would normally assess you at. It could also greatly
reduce your borrowing capacity.
To effectively work
out your true borrowing capacity it is important that you work
with someone who can not only guide you through the maze of
different lending policies but also help you get pre-approval
so you know how much you can spend.
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| Improving your borrowing capacity - a handy
checklist
This Checklist has been included in the Newsletter Members
only website resource InvestKit. Use the link below to access
it.
For over 100 pages of resources for investors go to www.investorschoice.com.au or click on the link below
Investors Choice Mortgages |
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I hope you have enjoyed the last two articles on Borrowing
Capacity and have learnt something that will help you when
considering a property purchase.
Please call me on 1800
464 810 if you’d like to discuss your potential borrowing
capacity, and don’t forget to visit the InvestKit on the
website for further tips and tools on effective property
investment.
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All the
best for the month ahead. I hope you can use the information
presented in this newsletter to assist you in your future wealth
creation. As always please forward this email to those you think may
be interested, my business is based on referrals, and hence I
appreciate you passing on this newsletter.
Until next month
I wish you happy and astute investing!
Jane
Disclaimer: You should always speak to a
financial planner or accountant about your particular circumstances,
the hints mentioned here are for general discussion only and do not
relate to your particular circumstances
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