Getting started with your property investment means being proactive and making strategic plans!

One key tactic you must plan for is how to improve and increase your borrowing capacity before you start the buying process. This article looks at the following five areas to put your borrowing capacity in the best position:

  • Minimise existing debt.
  • Minimise expenses.
  • Reduce excess credit limits.
  • Keep up-to-date financial records.
  • Access property equity.

Minimise existing debt

When being assessed for an investment loan, lenders look at the level of debt you’re already maintaining. This includes personal loans, car loans, student loans (HECS-HELP debt), credit cards/buy-now-pay-later facilities e.g. Afterpay, Humm90, Zippay etc., store credit financing, outstanding bills and so on. The more debts and lines of credit you have, the higher impact it has on your credit score.

By minimising your overall debt amounts and the number of repayments required, you can improve your borrowing capacity. Ideally, you should pay off as many of these debts as you can before applying for your investment loan. If you’re unable to pay those debts off, consolidate those debts into one loan with lower interest as a strategy to improve your borrowing capacity.

If you have an existing home loan with a good interest rate, you might be able to roll your debts into your existing home loan. As your broker, we’ll guide you to decide if this is beneficial to your position overall and would improve your borrowing capacity for an investment property.

Minimise expenses

You may think that as the tenant’s rent at the investment property can cover the mortgage repayments your borrowing capacity is better than an owner-occupied property, but this is not the case. Lenders factor in the worst-case scenario e.g. the property remains vacant for long periods. Lenders must assess based on your expenses how you could make your loan repayments if the property is untenanted and add a “serviceability buffer” between 1-3% for the scenario of the cash rates being increased.

Take a look at your regular outgoing expenses and do everything you can to minimise them. For example, assessing gym memberships, pay TV/streaming service subscriptions, and whether you need your second car for the interim or short term?

Most of us are paying regularly for luxury items we don’t really need, so be ruthless with your budgeting strategies.

Reduce excess credit limits

Lenders assess your capacity to get into more debt with your lines of credit. So even if your credit card balance is zero, your potential to access that credit is readily available to you.

For example, you borrowing capacity could be reduced by $40,000 with a credit card with a $20,000 limit and two credit cards with $10,000 limits—even if you owe nothing on those cards. Lenders often calculate what you would have to repay if you actually used those limits and add that to your expenses.

To increase your borrowing capacity, cancelling the credit card/loan facilities that you don’t really need is recommended. If annual fees apply to those credit cards/loan facilities, cancelling them also reduces your expenses.

Keep up-to-date financial records

One of the most common reasons why property investors find their borrowing capacity is limited is due to being unable to prove their income and financial position to the lender as their financial information isn’t up to date. Your latest tax return is the best proof of your financial position and earning capacity to provide to a lender, so having them completed and readily accessible is critical—particularly for sole traders.

Generally, lenders ask for three or four payslips or bank statements as proof of income, but these may provide an inaccurate view due to people being either self-employed (sole trader) or earning commissions or bonuses. This may reduce your borrowing capacity or impact the interest rate the lender can offer.

Providing detailed and extensive documentation about any income you receive from existing investment properties, stocks and shares, or renter in your home will assist the lender to make an accurate assessment.

Access property equity

If you already own property, you may be able to access the equity available to help you secure finance to purchase another property. Your equity is the difference between what the property is valued at in the current market, and how much you owe against it.

Your property’s equity increases due to paying down your mortgage and as the property’s value increases. For example, if your $500,000 property increases in value by 10% over the two years you own it, that’s an extra $50,000 in equity. You can also factor the amount your mortgage has reduced through your repayments to date.

To access your property’s equity, you need an accurate valuation from a valuations expert. We can refer you to the experts we recommend. The lender also purchases a proper valuation. Naturally, how you present your property and any making improvements or renovations (without overcapitalising) can positively influence the property’s valuation. This can be a fast way to increase your borrowing capacity so you can get into your next investment sooner.

We’re here to support you in your ambition to use property to responsibly build wealth for your future and retirement, so give us a call today.