3 – CALCULATING YOUR BUYING POWER

What is Buying Power?

Buying Power is your ability to actually buy a property.  Its as simple as that.  So what enables you to actually buy a property?  Well Buying Power follows this simple equation:

BUYING POWER = (deposit you actually have) + (mortgage you’re able to get)

Each part of the equation are dependent on each other.  The mortgage you able to get is dependent on the deposit level you have.  If the mortgage requires a deposit level but you do not have a deposit then it doesn’t matter how much you earn – you’re Buying Power is ZERO!

So lets look at this simple example:

Katy is at Status Ranking 4.  She earns £30,000 per year, she has £8,000 in the bank and has bad credit.  She applies to an adverse credit lender who offer her a standard 3.5 times her salary as borrowings.  Her Buying Power equates to:

£113,000          =       (£8,000)                 + (3.5 x £30,000 = £105,000)

BUYING POWER =(deposit you actually have) + (mortgage you’re able to get)

So Katy can buy a property up to a value of £113,000.  Katy will be very happy if she wants to buy a property for £80,000 as she can clearly afford this.  What happens if she wants to buy a property for £150,000?

Well obviously she needs to increase her Buying Power.  So how does she do this?  Find out below.

Increasing Buying Power

Can I remind you of what I said in the earlier chapter about Status Rankings:

‘So to identify your status ranking you need to think about these 3 key factors: 

1. Whether you save money and how much
2. How much money you earn, how you spend money and the amounts spent
3. Your credit history’

To increase buying power you need to think about these 3 key factors:

1. Whether you save money and how much
2. How much you earn, how you spend money and the amounts spent
3. Your credit history

Spot the similarity?

The factors involved in rising up the Status Ranking are the same as the factors involved in increasing your Buying Power.  To rise up the Status Ranking you automatically increase your Buying Power.  Let me explain why.  Looking at each factor in turn.

1. Whether you save money and how much

Let me remind you of the Buying Power equation:

BUYING POWER =(deposit you actually have) + (mortgage you’re able to get)

If you save money then you can only increase the deposit you actually have.  The more money you have to put down the higher your Buying Power is.

Let me remind you of the Status Ranking:

If you have ‘enough for a deposit’ then you are ranked, assuming all other factors equal, higher than someone who does ‘not have enough for a deposit’.  So if you save and get to a level that takes you from not having enough to having enough then your ranking rises.

So the key point is to SAVE!  Saving also has a doubling effect.  Due to the way mortgage companies work the more deposit you have you can:

1. Increase the number of lenders wishing to lend to you thus increasing your choice of lender
2. Increase the income multiples offered to you thus increasing your Buying Power
3. Reduce the amount of mortgage relative to the property price thus lowering the risk to lender and resulting in a lower interest rate.

So if Katy saved further and had £12,000 to put down she could go to a different lender offering her 4 times her salary.  Thus her Buying Power is:

BUYING POWER = £12,000 + (4 x £30,000) = £132,000.

So Katy has increased her Buying Power from £113,000 to £132,000 – that’s an increase of £19,000 by simply having £4,000 more to put down as a deposit (£12,000 - £8,000 = £4,000).

Tips on how to save are detailed in Chapter 5 – Increasing your Buying Power by Increasing Your Status Ranking.

2. How much you earn, how you spend money and the amounts spent

Let me remind you of the Buying Power equation:

BUYING POWER =(deposit you actually have) + (mortgage you’re able to get)

If you earn more money then you can only increase the mortgage you’re able to get.  The more money you earn the higher your Buying Power is.   So in our above example, if Katy increased her earnings to £35,000 then the mortgage she could get, assuming all other factors equal, a mortgage for 3.5 x £35,000 = £122,500.  This would mean her Buying Power increases from £113,000 to £130,500 – an increase of £17,500.

I can hear what you’re saying – how the hell do I increase my earnings?  Well it depends on you!  Tips on how to increase your earnings are detailed in Chapter 5 – Increasing your Buying Power by Increasing Your Status Ranking.

3. Your credit history

Your credit history has a direct effect on your Status Ranking and an indirect effect on your Buying Power.

If your credit history is improved then, all things being equal, it increases your Status Ranking.  This will only increase your Buying Power due to the wider range of financial products available to you.

Your credit history affects the total amount you can borrow and, if you credit history is good, it reduces the amount you need to put down as a deposit. For example if you have bad credit, no deposit and can only get a 90% mortgage then you can’t buy anything hence Buying Power = 0.  If you improve your credit then you can get a 100% hence your Buying Power = something, and you can buy a property for no money down.

Tips on how to improve your credit history are in Chapter 5 – Increasing your Buying Power by Increasing Your Status Ranking.

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