In the current property climate, where opportunities abound for the less skittish, savvy investors out there, the last thing you want to hold you back from securing an additional asset for your portfolio is any restriction on your borrowing capacity.
But that is a reality many investors face given the banks heightened wariness around refinancing and tighter restrictions on how much money they’re prepared to put up for those of us who decide to build wealth with bricks and mortar.
Don’t get me wrong, real estate is still recognised as one of the more stable forms of security by lenders, even in these less than certain economic times, but when you’re ready to leverage into another investment the last thing you need is the bank deciding to cutting you off.
One of the reasons for this more conservative borrowing stance from Aussie lenders is a greater focus on regulations around serviceability and more responsible lending post-GFC.
But while the banks should and do have a legal obligation to make sure borrowers can meet their repayment responsibilities, the problem is different lenders have different benchmarks for determining an individual’s ability to repay their debt.
I know of some lenders that will hand over an extra $100,000 than others to the same borrower based on the same level of income and expenses. That is how disparate lending restrictions can be and the worst part is, you won’t necessarily be aware of who will be more generous with their funding until you make your loan application.
So how do you beat the banks and borrow more (responsibly of course!)? Here are my six surefire ways to maximise your borrowing power.
1. Don’t get sloppy with your paperwork.
A lot of investors (and all other mere mortals) are guilty of getting a bit lax on the odd occasion when it comes to things like handing in tax returns on time and keeping financial records up to date.
But good bookkeeping can go a long way when it comes to proving your borrowing capacity to the banks.
Being able to demonstrate your combined income, from all investments as well as your day job, with your latest notice of assessment from the tax office will make the banks feel more confident about your ability to meet your repayment commitments.
And let’s face it; an investor who obviously runs a tight financial ship will be looked upon far more favourably by number crunching credit assessors!
2. Tidy up your debts.
Noticing a theme here? I’m not a clean freak, but consolidating any unsecured debt you might have such as credit cards or personal loans into your mortgage can make a big impact on how much you can borrow down the track.
The problem with this type of debt is the repayment levels are generally higher. Even if you have a low interest loan or credit card, the banks will use their own calculations to determine how much of a dint these debts will make in your monthly income.
Sure your mortgage might be a bit higher by combining the debt, but at the end of the day your application will show less unsecured financial commitments and therefore less red flags when it comes to how much credit you can manage.
Additionally, you should cut up any cards you don’t really need and get rid of them entirely wherever possible. Not only will having just one credit card make you a more attractive prospect for the banks, it will also make your wallet a lot lighter!
If you do need a credit card for life’s little emergencies, keep the limit to a minimum and make your repayments on time all the time.
Essentially, for every extra $1,000 limit you have on a credit card you will lose about $4,000 worth of borrowing capacity.
3. Be pro-active in your product search.
Professional Packages can be fantastic, offering line of credit facilities, credit cards and many other bells and whistles linked to your loan. But for every extra feature some banks want to throw at you, the less money they’ll be prepared to toss your way.
Shop around to find out which lenders will provide the extra features you need, such as a line of credit or interest only repayments, without limiting your spending power on that next property investment.
Furthermore, go all out to secure a good interest rate deal. I know this sounds obvious but many borrowers are still reluctant to barter the banks down on their interest rates.
If you’re one of them, consider this next time you confront your lender; reducing the interest rate payable on your loan by 0.5% on an average $400,000 loan could free up $2,000 of your annual cashflow that would otherwise be listed on your loan application as outgoing cashflow.
4. Make sure your rental income (and every other cent you earn) counts!
Again, all lenders look at income streams differently. Some will accept a higher percentage of your rental profits than others as annual income, some might not even consider things like commissions or company profits that boost your base salary.
Essentially, for every extra dollar of income a lender acknowledges, your borrowing power increases. So be aware of what the banks will and won’t accept and if in doubt, consult a good finance broker.
5. Structure your debt properly
How you structure your finances is just as important as the strategy and structure you adopt for your property portfolio itself.
Investors who take that little bit of extra time to work out how to maximise their investment gains by buying assets in different names and structures, and therefore spreading the associated debt between individuals (such as a husband and wife) and things like trusts, can not only greatly increase their borrowing power, but also reduce their tax liability so they have more spare change.
6. Give your loan a longer (interest only) life
Quite simply, the longer your loan term, the smaller your monthly repayments will be. If you have multiple debts across your property portfolio, it might be worth considering taking 30 year loans as opposed to 25, thereby minimizing your repayment obligations.
Additionally, you can opt to make interest only repayments, which will have the same effect.
While some investors are wary of these methods, believing they will be accruing and paying the debts on their portfolio for the rest of their life and therefore won’t have that wealth to enjoy upon retirement, if you take a big picture view and invest in high growth property, nothing could be farther from the truth.
If you would like more financial guidance to ensure you maximise your borrowing muscle and have the funding on hand to take advantage of the many investment opportunities that abound in today’s property market, don’t hesitate to seek assistance from the experts at Metropole Finance. We recommend the strategies that we use ourselves.
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