Ep7: Ask Max: How patience & paying off debt can increase your borrowing capacity.

Welcome to the Weekend Investor.

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I'm Max Lending, your industry insider, and we're lifting the lid on the finance market, guiding you on how to cut through the jargon, manage your finances and get investing into the property market.

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Ladies and gentlemen, you know my next guest.

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Please welcome back to the Late Show Max, Max, Max, Max, Max, Max, Max, Max, Max, Max, Max.

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Who could forget the name of a magnetic individual like you?

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Max, Max, Max, Max, Max, Max, Max.

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That's the way Max is.

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Decisive, uncompromising and rude.

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OK, welcome to the very first episode of Ask Max.

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We've been receiving.

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Quite a lot of emails coming through with different listener scenarios and we thought why not best to go through them live on air.

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We've got a couple, but today we'll go through one in particular.

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Uh, we'll go through it together and see what their maximum borrowing capacity is and also see if we can help them out a little bit to get to their goals a little bit quicker.

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And remember, feel free to e-mail us at info@weekendinvestor.com dot AU send through those scenarios.

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We'd love to help out and point you in the right direction.

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All right.

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And as usual, let's not waste any time and let's get stuck into it.

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OK, we've got a couple here named Bob and Jane.

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I've changed the names for privacy reasons, as you can probably tell it goes.

01:35

Hi, Max.

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Love the podcast.

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Uh, perfect.

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Good start.

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Butter me up.

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Our small family is looking to move on from renting and wanting to purchase our first home.

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We're looking to stay in the same area that we're in.

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OK, I'm going to just remove the the actual area here.

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I won't list it just for privacy reasons again, but it's pretty good.

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Nice affluent area.

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House prices around here are approximately 1.1 million for a simple three-bedroom house.

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We have two children in primary school, so we need to upgrade in the near future to a bigger house to cater for our growing family.

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Financial details are below.

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OK, let's have a look here together and we'll see what this young family of four are playing with.

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OK, income wise, we have the husband.

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He works in telecommunications.

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He earns ninety-two $1000 base income.

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Now just remember, base income is the income before adding any superannuation.

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OK, the wife works as a nurse and earns 80,000 base plus 30,000 in overtime.

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And looks like 5000 in shift allowances.

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OK, OKSo we've got look, it's a pretty typical situation here.

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If you think about it, their incomes are good, both applicants are working.

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Uh, I like how the female applicant, Uh, Jane's got the ability to do overtime here and increase her income if need be.

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Uh, always a good option to have up your sleeve.

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Let's look to see what sort of assets they've got asset wise.

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Uh, there's no other.

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Housing.

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This is gonna be their first house.

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They've got cash, so they have $110,000 currently in cash.

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They have 90,000 and $80,000 respectively in their superannuation liabilities.

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What have they got?

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They've got a car loan that's for 45,000.

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We might have to have a look at that cause uh, car loans always have a big effect on your borrowing capacity here.

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They've got credit cards, Uh-2 credit cards, each with a $10,000 limit.

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The balance on these cards are 2000 and 3000.

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OK, so side note here, when it comes to credit cards, banks actually look at the limits, not the balance.

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So you've got one credit card here with a 2K balance and a 10K limit.

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But when it comes for serviceability testing, the bank factors in the limit.

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They don't care what the balance is, it could be 0, but they'll factor in $10,000 in the assistance for the credit card limit.

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Now they've got two of these, so there's $20,000 limit they're factoring in.

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They've got some, uh, HECS debt or HELP debt from uni.

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The male applicant has actually paid his off and the female applicant has 12,000 left.

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And they've got two kids in primary school.

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You'll notice I've put the two kids in the liability section.

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I'm not being biased.

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It's just the way it is.

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We're gonna go down a conservative route for the female applicant's income.

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Because she's a nurse, she's actually classified as an essential service.

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And some banks will factor in 100% of any of her variable income for servicing purposes, while other banks will only factor in 80% of that income for servicing.

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So she's got overtime and allowances.

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We'll be conservative and we'll go down and only use 80% of this income for servicing purposes.

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All right, here's the fun part.

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Let's put this into the weekend investor calculator to figure out what the maximum borrowing capacity is.

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While I do this though, you can listen to the classical Rush E song being played on 4 calculators simultaneously.

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OK, that's enough.

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All right.

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All rightI promise I won't do that again.

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Looks like the maximum loan they could have is 615.

06:01

Oh, that's probably not what they were looking for.

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If we go back to the scenario, they wanted to stay in the area for a three-bedroom house and the average house price was quoted at 1.1 million for a three-bedroom, which means they would need 400,000 approximately just to complete the purchase.

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We haven't even factored in stamp duty costs, legal costs, and currently they've only got 110,000 in savings, so we're nowhere near it.

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OK, let's sprinkle some Max lending hope into this.

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It's not all doom and gloom.

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So let's look at the positives.

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We've got a combined household income of about 200,000 and they've been able to save $110,000.

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So fantastic work guys on the savings.

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Let's use that though.

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And I know you're not going to like this, but to pay off some of that debt, it's all going to make sense.

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So just bear with me and we'll go through the numbers again.

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I'll make the amendments on the fly.

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And as we do that, we'll go through what the change in the maximum borrowing capacity is for each little change that we make in terms of their debt.

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The female applicant has $12,000 in HECS debt.

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So let's see what happens if we pay off this HECS or the HELP debt, whatever you call it, uh, and see how that affects it.

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OK.

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All right.

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Looks like we're cooking with gas.

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We've jumped from.

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615,000 to 695,000 just by making that small amendment.

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So that's using some of that cash and we'll pay off that $12,000 hex bill.

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All right, what's next on the chopping block?

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All right, we've got the car loan.

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That's 45,000.

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Now if we pay this off, just remember that's also gonna free up those monthly repayments that they're making towards that car.

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So let's do that.

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Let's see here.

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Oh, wow, wow, wee wow.

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Once we pay off the car loan, it jumps from 695 up to 800,000.

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We're getting close to the figure these guys want.

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Let's do a quick recap.

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So we've started with 110,000 in cash.

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We've used 45,000 of that to pay off the car loan and we've used 12,000 to pay off the hex or help debt.

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That leaves us with 53,000 in cash.

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I know it hurts to spend that much cash when it's probably taken a long time and a lot of hard work and sacrifice to save it initially, but there is method in my madness.

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This leaves the lucky last items being the credit cards.

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All right, if you remember, we've got two credit cards with $10,000 limit each.

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Fun fact, for every $5000 limit.

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That's about 20 to twenty-five 1000 reduction in your servicing capacity.

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Let me repeat that.

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For every $5000 credit card limit, it will reduce your servicing capacity or your lending capacity by 20 to twenty-five 1000.

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So if you're playing along here at home, what do you think I'm about to do?

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Do you need a $20,000 limit for the rainy day?

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Cause everyone's so afraid to get rid of their credit cards.

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You know the answer, it's no.

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They've got that small balance.

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So let's just pay off that small balance of 5K with the cash they've got and we're gonna reduce that limit all the way down to $5000.

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So we're gonna close off one of these credit cards and we'll reduce the other one to 5000, leaving them with one credit card.

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With this small change, let's have a look and see what their new maximum borrowing capacity is.

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Can I have a drum roll, please?

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It's $850,000.

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I know, I know, I know what you're about to say.

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You're gonna go, Max, but Bob and Jane have spent all of their cash on paying off their debts and they don't have any money for the deposit.

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You've left them with $48,000 only.

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Have I really?

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Or have you just got no patience?

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This is what's called a snowball effect, yes.

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They may have to wait a little longer to get their house, but when they are ready, they're going to be debt free and they're actually going to be able to afford the area they want to live in.

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They've got two options.

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They can do it this way, or option two, they can go off now and try and purchase a house in a suburb in the middle of nowhere, hating their life, hating the area because they had no patience.

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So be patient, save, be diligent.

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And buy in the area you actually want that has potential for growth.

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They're going to very quickly going to start to recoup that money and start adding to their savings.

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Just remember, they've got no car repayment and they're being able to save the additional repayments that's going towards their hex.

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I'll leave it there.

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There's lots of different avenues we could have gone down.

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This was just one of them.

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We didn't even touch on the potential of rent vesting.

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We'll leave that for another episode.

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As usual, you stay classy and I'll see you at the next one.

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If you have a question that you would like answered on the show about budgeting, mortgages or finance, then drop us a line either via our socials, e-mail or website.

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Details available in the show notes.

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Any opinions and views expressed in this program are just that.

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Opinions.

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All information is general in nature and should not be seen as financial, economic, legal, investment, accounting or tax advice.

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This program makes no representation or warranty as to the accuracy or completeness of any information contained in this program.

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You should consult a professional advisor in relation to your own personal circumstances.