We’ve all heard that APRA’s restriction has caused the banks to tighten the screws and make it harder for many investors to get a new loan of refinance their existing loans.
But the availability finance is the lifeblood of every property investor, giving them the means to leverage into real estate with other people’s money and manage all the ongoing costs, including monthly mortgage repayments, management fees and maintenance bills.
With today’s low interest rates and subsequently cheap debt, many investors are currently finding themselves in a fairly favourable cashflow position, even if they started out heavily geared in high growth assets.
But as the banks tighten their purse strings in response to macroprudential controls, investors might need to think outside the square when it comes to gearing into further properties.
You see, even if you’re in a comfortable debt position according to your own personal risk exposure the only judgement that matters when you apply for a mortgage is that of the banks assessment of your serviceability.
So here are eight strategies to make sure an invisible serviceability ceiling doesn’t stop you from growing your property portfolio in the future…
Even if you have a credit card with a limit of $10,000 that’s never been touched, the banks will count this as a liability when it comes to assessingyour serviceability.
And for every $10,000 worth of credit that’s available to you, the bank will knock $300 off the funds at your disposal to service a loan.
Get rid of all credit cards except perhaps one, with a lower limit of say $2000 to $5000 for emergencies.
Make the monthly payments for any existing card balances on time and work to reduce any credit card debt you currently have.
If you have a number of outstanding balances across different credit cards and/or personal loans, you might want to think about consolidating this type of unsecured debt into your mortgage.
This means those hefty monthly repayments associated with high interest credit facilities will no longer factor into the lender’s serviceability calculations; which is a good thing when you consider how heavily they can weigh against you.
Provide the lender with the most recent information regarding your income and make sure tax returns are lodged on time, particularly if you receive a low base salary padded with generous bonuses throughout the year.
Depending on your wage structure, two payslips may not provide an accurate serviceability picture, so it’s good to ensure the lender can request a more comprehensive payment summary from the ATO.
Choosing a low rate mortgage without all the bells and whistles that mean extra bank fees can effectively lower your monthly repayments and therefore, enhance your serviceability profile.
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A good mortgage broker can help you to identify loan products most suited to your needs, with features that could potentially work to increase your financial capacity, as the banks’ see it.
Importantly, mortgage brokers also know how different lenders operate when it comes to ‘unwritten rules’ around the treatment of various income streams, such as rent.
Logically, the more income the lender is prepared to assess, the better your serviceability.
So it pays to find the right product.
If you plan on buying property in your own name, giving the lender paperwork that demonstrates how your partner shares the financial load could give you a better, personal serviceability outcome.
I know that I’ve warned investors against giving lenders all of your properties on a platter in cross securitised loan structures, but offering additional security to the bank can allow you to borrow at a higher LVR, thereby reducing the amount you’ll have to pay from your own pocket.
This would have to be a last resort type method of increasing your serviceability however, given the bank would repossess all assets attached to the loan if things go pear shaped, and for all other reasons we have advised you not to cross-collateralize.
Longer loan terms equal reduced monthly financial obligations and therefore, more serviceability muscle to flex.
Most lenders allow for a maximum mortgage of 30 years, however some will consider 40 years for the right candidate, with that extra ten years shaving hundreds off your repayments.
Of course the downside is that it will take longer to reduce your property related debt, and will ultimately end up paying significantly more, so this approach isn’t really advisable for investors looking to consolidate their debts in the lead up to retirement.
This is the easiest strategy to implement and one that you have complete control over.
Building up as much cash or equity as possible before borrowing to buy an investment property will obviously work to decrease your loan obligations and therefore, ramp up your serviceability.
Ultimately, optimal debt management that allows you to grow your portfolio sustainably and successfully is all about careful and considered planning.
Get it right and you’ll find the stress often associated with property finance is greatly reduced, while your potential to create long-term wealth through residential real estate will increase substantially.