The holiday season is a time for winding down, but for those with future financial goals, like upgrading their home or purchasing an investment property – it should also be a time to review and prepare.
The relationship between your everyday spending habits and your future borrowing power has never been tighter. Banks are scrutinising applicants’ finances more closely than ever, making your current financial behaviour critical to achieving your long-term objectives.
At Fabe Financial, we want to help you make sure that when you are ready to buy a home, upgrade a home or purchase an investment property, your borrowing ability aligns perfectly with your financial goals.
The reality of loan applications
Gone are the days when a lender simply looked at your income and deposit size. Today, banks are conducting deep dives into your accounts to assess your real-world spending habits and financial discipline.
Banks are looking more closely at your spending patterns and things like discretionary expenditure, credit card limits, and repayment history. Excessive spending, even temporarily, can impact the bank’s assessment of your ability to service a new loan.
Lenders need confidence that you can comfortably manage your existing commitments while taking on additional debt. Your borrowing capacity is directly influenced by how you manage your cash flow.
If you have ambitions to upgrade the home or buy an investment property over the next couple of years, now is the time to ensure your finances tell the right story to a potential lender.
A proactive financial checklist
To ensure your financial objectives are achievable when it’s time to actually access the finance, here are some key areas to focus on right now:
1. Audit and adjust your cash flow
The holiday season is notorious for increased spending. Take time now to review where your money is going and make strategic adjustments.
Pinpoint areas where you can comfortably reduce spending, such as unused subscriptions, dining out, or non-essential purchases. Reducing these items demonstrates control and frees up cash flow.
Lenders flag excessive gambling transactions or numerous large cash withdrawals as high-risk behaviour, which can lead to application delays or even rejection, so make sure to minimise both.
While credit cards can be useful, high balances or frequent use right before a loan application can negatively affect your serviceability. Aim to pay down any outstanding balances and use them sparingly.
Lenders are impressed by clients who maintain a healthy buffer of savings. As a general guide, having at least $10,000 in accessible savings is often considered a comfortable minimum by banks and can help avoid additional questions around low savings balances. Prioritising saving over excessive spending helps demonstrate financial resilience and improves your overall borrowing profile.
2. Clean up your debt profile
If you carry any small, high-interest debts, the holiday period is a perfect time to eliminate them.
Personal loans and car loan repayments can significantly reduce your borrowing capacity. If possible, accelerate repayment on these loans.
Pay off small personal loans, credit cards, or ‘Buy Now, Pay Later’ (BNPL) facilities entirely if you can. Even a zero-balance BNPL account still needs to be disclosed and can sometimes negatively impact your assessment.
Even if you pay your credit cards off every month, the limit of the card – not the balance – is often used in serviceability calculations. Reducing the limits on credit cards can have an impact on boosting your borrowing capacity.
If you have multiple small debts, talk to us about whether debt consolidation could simplify your profile, but ensure the structure is better than your existing arrangement.
3. Organise your documents
Waiting until the moment you find a property to gather your documents will cause significant stress and delay.
Create a digital folder now with your last two consecutive pay slips, your most recent Group Certificate/Payment Summary, the last two years of Notice of Assessments (NOA), 90 days of bank statements showing regular salary credits and evidence of genuine savings for the deposit and current statements for all liabilities (existing mortgage, personal loan, car loan, credit card).
You’re going to need this information, so the sooner you have it all prepared the quicker you’ll be able to obtain your finance approval.
4. Define and align your borrowing objectives
You need a clear financial destination to build a solid strategy.
Clearly define what you want to achieve from a borrowing perspective. Do you want to upgrade your current home, buy an investment property, or both?
If you already have a loan, now is a great time to check in and make sure you have the right rate. A small reduction in your interest rate can free up thousands in cash flow, which directly aids your serviceability for the next purchase. Additionally, increasing the term of your loan can increase your borrowing capacity as it reduces your monthly repayment, however you may ultimately pay more interest over the revised loan term, so it’s worth engaging with a financial planner to ensure this is the correct strategy.
Once your goal is clear, your broker can start to put in place borrowing strategies to make sure that those financial objectives are going to be achievable when the time comes.
5. Confirm your strategy with your broker
This is the most crucial step. Before you start searching for a property, confirm your maximum borrowing capacity and strategy with an expert.
- Get pre-approval: This gives you a clear budget and the confidence to negotiate when you find the right property. A broker can check your rate, ensure you have a financial strategy that lines up with your objectives, and help you get the best lending structure.
- Optimise your structure: A good broker will help you structure your loan to optimise for ‘good debt’ and effectively leverage equity for future investments, ensuring your mortgage works for you, not just the bank.
Don’t wait until it’s too late
The biggest mistake aspiring borrowers make is waiting until the last minute – when they have found the perfect property – to start addressing their finances. By that point, if the bank sees an unfavourable spending profile, you may face unnecessary delays or, worse, a reduced borrowing capacity.
By getting prepared now, and working with a broker early, you gain a competitive advantage over the next few months to put you in a position to take advantage of your next property decision.
Ready to turn your financial goals into reality? Reach out to Fabe Financial today to check in on your financial health and prepare your borrowing strategy for the new year.