Borrowing capacity is an important factor to consider when applying for a loan, as it determines how much money a lender is willing to lend you. In order to maximise your borrowing capacity, it’s important to understand the different loan structures available and how they can impact your ability to borrow.
One of the most common loan structures is the principal and interest (P&I) loan. With this type of loan, you will make regular payments towards both the principal (the amount you borrowed) and the interest (the cost of borrowing the money). P&I loans are typically used for purchasing an owner occupied property.
Another loan structure is the interest-only (IO) loan. With an IO loan, you will only make payments towards the interest on the loan, and not the principal. This can make the loan more affordable in the short-term, but it will mean you will have to pay off the entire principal in the remainder of the loan term (once the interest only period ends). IO loans are commonly used for investment properties, as they can help to maximise the cash flow from the property. Don’t forget though, taking out an IO loan reduces your borrowing capacity as the principal must be repaid over a shorter timeframe.
A third loan structure is the line of credit (LOC) loan. A LOC loan is a revolving line of credit that you can access as you need it, similar to a credit card. With a LOC loan, you only pay interest on the amount you borrow, and you can make repayments as you go, or make a lump sum repayment at the end of the loan term. This type of loan can be a good option for those who need flexibility in their borrowing, or for those who are looking to consolidate existing debts. (LOC’s do not exist in Australia anymore).
There are also the combination loans, such as a split loan, where a borrower can have a portion of the loan as P&I and the other as IO. This allows the borrower to have the benefits of both the loan structures and can help to increase the borrowing capacity.
Finally, some lenders will allow applicants to access owner occupied loan rates if they use an owner occupied property as security, even if the purpose of the funds is purchasing an investment.
To maximise your borrowing capacity, it’s important to understand the different loan structures available, how they can impact your ability to borrow and the best way to structure you overall borrowing requirements to maximise flexibility and funds available. It’s also a good idea to speak with a mortgage broker or financial advisor to help you determine which loan structure is best for your individual circumstances. With the right loan structure and the right lender, you can maximise your borrowing capacity and achieve your financial goals.
It’s also important to mention that having a good credit score, stable income and a low debt-to-income ratio can help you to increase your borrowing capacity. Additionally, having a good savings history and a low loan-to-value ratio can also help to increase your borrowing capacity.
In conclusion, understanding the different loan structures available and how they can impact your ability to borrow is an important step in maximising your borrowing capacity. It’s a good idea to speak with a mortgage broker or financial advisor to help you determine which loan structure is best for your individual circumstances. With the right loan structure, lender and financial situation, you can maximise your borrowing capacity and achieve your financial goals.
