How to increase your borrowing capacity and buy your first home

One of the hurdles that many would-be property owner face, is reducing their existing debt in order to pass lenders home loan serviceability assessment for the amount they need to buy their home.

Debt sounds like such a dirty word, doesn't it? Thing is, there is good debt and than there’s bad debt.

Good debt has the potential to make you money, debt such as mortgage on a property which will potentially experience capital growth during your ownership is an example of a good debt.

On the other hand, bad debt has the potential to cost you money, debt such as a personal loan for a new car or, worse still, using your credit card to pay for an overseas holiday (remember those) that you really couldn’t afford in the first place.

It might seem easier said than done, but there are some simple strategies you can use to reduce your bad debt and increase your home loan borrowing capacity. Here’s four to help you start:

1. Track your spending

It's a sad reality that many people have no idea how much they spend every month.

In fact, many Australians live from one pay period to the next with not much left over before they eventually get paid again.

One of the first steps to getting out of debt is to simply track your spending.

A good way to do this is to create a spreadsheet or similar where you can input all of your spending in a month.

If you do this for a month or two, you will soon start to see where all of your money is going.

You see, buying your lunch and two coffees every day for $30 soon becomes $150 per week – and $600 a month.

2. Have a budget – and stick to it!

Using the above example, then, another strategy would be creating a budget and stick to it.

So, instead of buying lunch every day, you could only do that on Friday's as a treat.

That way, you'll save nearly $500 a month, without missing out entirely.

No one wants to live on baked beans to reduce their debt so it's important to create a realistic budget.

An unnecessarily strict budget is doomed to fail from the start, plan to maximise savings.

3. Create some extra income

In today's world of the sharing economy there are a number of ways that you can boost your income.

However, you choose to create extra income, it's a sound strategy to increase what's coming in so you can reduce your debt more quickly.

By earning at extra $500 a month, perhaps you can pay down that personal loan faster, which will allow you to save a deposit for your first home.

Again, be realistic about the time that you have available to take on extra work.

Reducing debt shouldn't turn you into a slave to the red numbers while you're trying to them into black ones instead.

4. Say no to easy credit

There is nothing fundamentally wrong with credit cards – as long as you can pay back the balance in full every month. The same applies to ‘buy now pay later’ facilities, you need to payout the balance as per the instalment plan so that no late fee is applied.

You want privilege of using someone else's money interest free, credit card and the ‘buy now pay later’ facility, while your money earns interest elsewhere.

If you can't afford to pay off your credit card balance every month, then you can't afford a credit card. It really is that simple.

Too many Australians get caught in the debt-trap of paying the minimum off their credit card every month, which means they'll likely never pay it off.

Here's the thing...

You can reduce your debt by preventing it from building it up in the first place.

Choose a debit card instead so you're spending money that you do have, rather than money that you don't.

Getting out debt involves planning and it requires resolve so that you can increase your borrowing power and buy they property you want.

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This article via Your Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.