One question we often get asked is how do people continually borrow and increase their property holdings when it seems some banks struggle to lend most people enough to buy their first home?
While so many property investors have the aspirations of owning a property portfolio of 2, 3, 5 or 10 properties, it happens all too often that they can’t overcome that 2 property hurdle because of limitations in their borrowing capacity.
As we’ve covered, interest rates are at all-time lows so shouldn’t you be able to borrow more than before? How do the best property investors set themselves up for success and continue to grow their portfolios? Here are our top 7 tips on how to increase your borrowing capacity.
Tip 1: Reduce any cards or limits you don’t need.
It’s amazing how many people have credit cards with limits of $5,000 to $10,000 that they have never used. A new bank will count this as a liability and assume the card can be fully drawn when they are looking at how much you can borrow. As can be seen from the table below, a decrease in a credit card with a limit of $10,000 actually can increase your borrowing capacity by around $40,000.
The same goes for interest-free loans, or HELP debt. Just because the interest rate is low or you don’t need to make regular repayments, the banks will always assume the most conservative position and calculate the figures around this. As you can see below, a $50,000 HELP debt can significantly decrease your borrowing capacity.
Tip 2: Clean up any unsecured debts.
Over the years you might have taken out a personal loan for a holiday or a car. As you can see from the table above, even a small car loan of only $500 per month can decrease the amount you can borrow by over $80,000. Conversely, paying out a personal loan which costs $250 per month can increase your total borrowing capacity by $40,000.
It can be surprising how much small debts can impact your overall capacity and slow down the speed at which you can build your property portfolio.
Time for a spring clean: You can clean up your unsecured debts in a few different ways, including 1. paying out and closing them with any savings you hold; 2. Consolidating them into one personal loan to minimise the repayments. Bear in mind this may cost you more over the long term so you need to factor total interest costs; or 3. Look at consolidating them into a larger home loan on a lower rate. Once again, you need to take into consideration total costs to make sure you aren’t extending out the amount of time it will take you to pay down the total debt.
Tip 3: Get your paperwork in check.
We have included a list of some common documents a bank will need to provide you with a home loan. It is surprising how often people do not know where their Group Certificates are or can’t find their rates notices.
It is also standard for banks to request your most recent month’s day to day transaction account to show where your income is being paid. If it is split across multiple accounts it can cause confusion and take the banks longer to process your application – so make sure your income is being paid to one account, and clearly marked so it is easy to verify your income.
- 2 x most recent payslips.
- Most recent years group certificate.
- Drivers licence, passport + Medicare card (100 points of ID).
- Most recent months’ rental statement.
- Most recent months’ day to day banking account statement (where income is paid).
- Most recent months’ credit card statement.
- Last 6 months’ home loan statements.
- Rates notice for all properties owned.
These are just a few of the documents the bank may ask for, so make sure you have them on hand. While it might seem like a lot of paperwork is needed, you have to remember the bank is loaning you hundreds of thousands of dollars so they need to do some checking to make sure you are able to repay the funds.
Tip 4: Look around for different home loan deals.
When you’re looking to buy a home or investment property, you wouldn’t normally just buy the first place you see – and it shouldn’t be the same with your home loan. You could potentially be taking thousands of dollars from your own pocket and putting it into your bank’s. If you don’t have the time to spend understanding the mortgage market then you need to speak with a mortgage broker to understand your situation and what various banks can offer you.
Now, this isn’t just limited to home loan rates because, surprisingly, different banks can potentially increase your borrowing capacity. If you have a look at the scenario we have put together below for 2 adults, no kids and a combined annual income of $85,000. There is over $139,000 difference in how much Lender A and Lender G will lend the couple!
Lender A $465,900
Lender B $456,438
Lender C $427,258
Lender D $411,000
Lender E $399,508
Lender F $361,459
Lender G $326,516
This also extends to Lenders Mortgage Insurance, where there can be thousands of dollars of difference between banks. In the scenario below, the difference between A and G is $5820. This amount over 30 years will cost $27,976 in interest!!
Lender A $10,301
Lender B $10,713
Lender C $12,007
Lender D $13,361
Lender E $14,597
Lender F $15,172
Lender G $16,121
Tip 5: If you have split loans with someone else, show how you are sharing them.
If you have owned property with friends or family members in the past you may own 50% of the property. Therefore, you own 50% of the home loan associated but in the eyes of some banks, you are considered wholly liable for the debt even though you only own 50% of the property. Fairly or unfairly, they assume you need to make 100% of the loan repayments but are only entitled to 50% of the rent. This can severely decrease your borrowing capacity.
For example, if you own a $300,000 property 50/50 with your brother and rent it for $300 per week with $200,000 loan, some banks would consider you liable for the entire $200,000 and only use $150 of the rental income per week towards your borrowing capacity. Whereas there are some banks who take it for what it is and use $150 of the rent per week but only apportion $100,000 of the loan to more fairly assess your income.
Tip 6: Consider extending your loan term.
This can be a bit of a risky strategy depending on your age and how many years you have left to work, but it can ultimately help increase your borrowing capacity if you need. The standard term of any housing loan in Australia is 30 years. However, if you have owned a property for 10 years and have 20 years left on the loan term, the repayments are going to be higher than if you extended the loan term out to 30 years. The downside to this is potentially increasing the total interest payable because you are paying off the loan over an additional 10 years.
Practically, this would look like this:
- $300,000 loan at 5% over 25 years – $1,753 per month with the total interest payable $226,131
If you, however, looked at extending the loan term to 30 years, it would look like this:
- $300,000 loan at 5% over 30 years – $1,610 per month with total interest payable $279,767
So while you would be reducing your repayments by around $140 per month (and therefore increasing your borrowing capacity), you would also be increasing the total interest payable on the loan by extending the term by 5 years.
Tip 7: Save, save, save!
Investors with 10, 20 or 50 properties ultimately got there through good cash flow management, buying great assets and starting with savings. While some of them may have started with a 5% or 10% deposit, once you build a property portfolio to $3m or more in assets, you need to reduce the LVR (loan to value ratio). The only way to do this is to build equity or save more for deposits on future purchases. This makes you less reliant on your borrowing capacity as the loan value is lower, therefore the income required to access the loan is lower.
How do I get started?
Overall, there are lots of factors that contribute to both decreasing or increasing your borrowing capacity that you need to be aware of. Make sure you are working with a professional mortgage broker like the team at Red & Co to maximise how much you can borrow, and grow your property portfolio in a sustainable way. Our property management team can also ensure you are maximising your rental yield and maintaining tenants to better your return. Book your 360 Portfolio Review today with a Red & Co Adviser here, or call us on 1300 88 7328.