In a recent article, we discussed what are commonly referred to in the finance industry as “The 4 C’s of Credit” – those critical boxes that borrowers must tick in order for the banks to approve your loan application.
Here at Intuitive Finance, we cannot stress enough to clients the importance of understanding and acknowledging how lenders assess your;
- Capacity to repay the loan amount being sought
- Character with regard to how seriously you take your financial commitments and manage any existing credit obligations
- Collateral that you are contributing to the deal in order to share the risk with the lender, and
- Capital to back your loan and make you an attractive customer.
So how do you make yourself more appealing to lenders and prove your credit worthiness?
For many property investors this is an important consideration, because if you can effectively reduce your risk exposure (both personally and from the banks’ perspective), you can greatly increase your borrowing capacity and therefore, your ability to leverage into more high yielding investments.
The good news is; it’s not as difficult to achieve this ideal outcome as you might think.
Here, we explore 10 simple strategies that we share with Intuitive clients to enhance their appeal as a borrower, whilst minimising risk and amplifying their capacity to build a wealth producing real estate portfolio.
1. Avoid cross-collateralised loan structures.
Lenders favour cross collateralizing as it affords them greater control over your assets and more options to assuage their risk exposure.
It effectively means tying up multiple properties as security over one loan with one bank, a structure that can become very messy very quickly.
For instance, if you want to refinance a property that has performed exceptionally well in order to purchase further investments, but you have one or two underperforming assets tied to that property, the lender can suggest that the overall fiscal health of your portfolio is too dicey to justify increasing your borrowings any further.
To avoid this scenario and the possibility of having to pay additional costs if you choose to sell off one asset and retain others within a cross-securitised loan structure, our advice is simple – don’t do it!
Instead, create stand-alone mortgages over each property in your portfolio and across multiple lenders, which puts you in the driver’s seat and eliminates unnecessary risk.
2. Use multiple lenders.
[sam id=43 codes=’true’]Rather than putting all of your proverbial property eggs in one basket, spread your credit commitments across a number of lenders.
Remember, each bank has different ways of assessing serviceability, as well as different options when it comes to the type of product and facilities available.
You are more likely to source better deals and maintain control of how and when you build your portfolio by not tying yourself to one particular lender.
3. Select the right property in the right area.
Logically, a property in a desirable location that has a strong history of above average capital growth will minimise potential risks associated with your portfolio, compared with an under-performing asset that can drag your entire borrowing capacity down.
4. Reduce credit card limits and eliminate personal debt.
When we demonstrate to clients how their often excessive and unnecessary credit limits impact borrowing capacity, they’re usually astounded.
The fact is though, a credit limit of $25-30,000 as opposed to a more functional level of credit at around $5,000 or $10,000, could diminish your borrowing power by as much as $100,000 to $120,000, whether you have maxed out those cards or not.
5. Don’t lodge multiple credit applications.
Some borrowers think the best way to get the best possible deal is to lodge applications with a number of lenders at the same time.
This couldn’t be further from the truth however.
Every credit application you submit is listed on your credit record. Banks will start to question your intentions, as well as your credit worthiness, if you appear to be “shopping around”.
In order to eliminate this issue, consult a professional broker who can explain the various options available and advise you on the best product for your requirements, without having to sully your good name.
6. Maintain stability in your employment and residence
We are a far more transient society now, than when our parents were in their working prime.
These days, various extraneous circumstances and more upwardly mobile career trajectories cause more of us to move around with greater frequency – be it in our jobs or places of residence.
However too many moves – on both counts – causes lenders to see you as a potential “flight risk” and makes you a less attractive credit prospect, leading them to question what they might stand to lose by backing you.
7. Establish and maintain the right debt structures.
Getting the right structures in place from the outset can save you a potential fortune in the long run.
First, consider what structure you will purchase your investments in – your own name, a partnership with your spouse, a trust or company structure, or your super fund.
There are numerous options available and it’s a case of selecting the optimum one for your requirements and goals.
Next, you need to ensure that you have the right facilities in place to maintain your loan commitments.
This means setting up a line of credit to act as your cashflow buffer, enabling you to hold your assets through the good times and bad, and establishing interest only loans over your investment properties, which will allow you to reduce what we refer to as “bad debt” (non-income producing) over your own home, whilst you are still in the accumulation phase of your investment endeavours.
8. Seek and trust professional advice.
If you want to be a professional property investor, then you have to be prepared to seek professional advice and importantly, trust that advice and take it on board.
Sadly, we have seen many people stall on their way up the property ladder because they felt they could do it all themselves.
Seek out qualified, experienced experts and be open and honest with them about your circumstances and investment ambitions.
9. Use your equity.
In this instance, we are talking about using your existing equity to establish that all important line of credit to act as a cashflow buffer.
Having this security in place with which you can support your ability to meet your loan repayments is critical.
Many investors feel they need to contribute their own income to support a property portfolio but the truth is, you can leverage your equity to cover any shortfall rather than being personally out of pocket.
10. Understand the process and ask questions
It might sound strange, but we have a very clear policy that means only proceeding with a client’s loan application after they have asked lots of questions and we are certain that they have a clear understanding of the process.
This is a significant, long-term financial commitment we are talking about after all, so never enter into something if you are unclear as to what it means for you.
Asking questions does not make you appear any less intelligent, but getting into a potentially very costly predicament with your finances might make you feel more than a little silly.