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In the current property climate, where opportunities abound, 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 the most stable form of security by lenders, but the watchful eye of APRA has led to a more conservative borrowing stance from Aussie lenders with a more responsible lending and a greater focus around serviceability.
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.
So how do you beat the banks and borrow more (responsibly of course!)?
Here are seven 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.
Having lots of debts on your file can have the lenders raising their eyebrows.
Why not roll up all the smaller debts under a single loan?
It would even streamline your payments and help you budget better.
Refinancing at a better rate by bringing all your loans under the refinanced loan can save you a lot of bucks over the life of the loan.
Unsecured debts (credit cards or personal loans) require repayment within a short period, which forces you to reduce your debts quickly.
The result is high monthly bills.
When a lender performs their servicing calculations, these debts will weigh heavily against you because they limit the amount of available funds that could be used to make payments on the proposed mortgage.
One possible solution to this dilemma is to combine your unsecured debt with your mortgage so that it won’t be reflected as a financial commitment (automatically increasing your serviceability).
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.
However if you own three credit cards with a limit of $15,000 each, the lenders will consider a potential loan of $45,000 on your hands, reducing your borrowing capacity considerably!
While this may not seem fair, most lenders prefer to err on the side of caution, as it is only human to dip into the amount that is so easily available to you.
Giving up that extra credit card will save you the annual maintenance fee as well as help you avoid high interest credit that can burn a hole in your pocket!
Essentially, for every extra $1,000 limit you have on a credit card you will lose about $4,000 worth of borrowing capacity.
3. Clean credit history
Another easy and effective way to increase your borrowing capacity is to maintain a clean credit history.
Paying all your utility bills on time (even the most inconspicuous ones) makes you a responsible borrower in the eyes of a potential lender and can increase your chances of approval as well as your borrowing capacity considerably.
It is a good idea to pull out your credit file from websites such as Equifax at no cost and fix any black spots before you file your loan application.
4. Understand your living expenses
It is important to calculate your living expenses clearly before you file a loan application, as lenders will take this into account for determining the amount they want to lend to you.
School fees for your children, any repayments for an investment property (many lenders assume the worst case scenario that the property may remain vacant for sometime) and the expensive club membership are all taken into account while determining your repayment capacity and consequently, your borrowing capacity.
5. Be pro-active in your product search.
The type of loan you have applied for can have an impact on the amount you can borrow.
Lenders always calculate your repayment capacity at an interest rate that is approximately 1.5% higher than the rate at which the loan is being offered.
However, when you go for a fixed rate loan, the repayment capacity for that period is usually calculated without any buffer.
Also, if you apply for a loan jointly with your partner, more often than not you can borrow more than what you would have as a sole applicant.
And while 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.
6. Make sure your rental income (and every other cent you earn) counts!
All lenders look at income streams differently.
Some will accept a higher percentage of your rental profits than others as part of your income, while 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.
7. Consider refinancing
If the conditions of your current loan(s) are not benefiting your investing, refinancing in order to reduce your interest rate, change your loan structure or extract more equity is an option you may wish to consider.
But any decision to refinance needs to come from a certain goal or purpose.
Having a detailed discussion with your mortgage broker – they can help determine whether refinancing will be beneficial to your circumstances and help you to weigh up the pros against the cons.
For example, 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.
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