In the majority of cases, your next deal will need some funding from a bank or financial lender to see you on your way.
So how do you go about increasing your borrowing power? Well, you need to step into the shoes of your bank or financial lender and understand the questions that they need you to answer.
Read on to learn your financial lender’s script, so you can get the borrowing power you need to keep climbing.
On the go? Here’s 30 seconds of key take outs:
- Financial lenders are just people like you and me. They’ll use their people skills to sound out a sound investor that keeps their loan book and risk profile looking healthy.
- At the same time, as part of their job they do have a bunch of criteria they need to check off before they can offer you a loan. Knowing what questions they have up their sleeve before applying for a loan will have you well prepared to ramp up your borrowing power.
- If you’re in a healthy state of mind, and you’ve got your finances under control, ramping up your borrowing power may simply be a matter of taking the plunge and looking for your next investment property.
Keep going >>
While they won’t stay this low for ever, interest rates are still at historic lows, and property values in well chosen locations continue to be more on a slow but steady up rather than down. This is an opportunistic time to look at how you can increase your borrowing power to add to your property investment portfolio while the going is good.
As an increasingly informed investor [well, by reading this article you are demonstrating your appetite to be in the know] knowledge will give you the capability to tweak things to improve your current position and take advantage of current property investment opportunities.
Let’s lift the hood up and take a look at some of the mechanics that banks and lenders take into account before approving your next investment loan.
Here are the questions your bank or financial lender will have prepared before you step into their interview room.
How are all your existing debts looking?
One of the first things that your lender will look at when assessing you for an investment loan is the level of debt that you are currently maintaining.
In addition to your existing home loan, they also take into consideration any other debts you may have including personal loans, car loans, student loans, credit cards, store credit financing, outstanding bills and so on. The more of these you have on the go, the more impact it will have on your credit score with a lender.
By minimising your debts and the number of repayments you must make, you can help to increase your borrowing capacity in your lender’s eyes.
To achieve this, it’s a good idea to pay off as many of these debts as you can before you apply for your investment loan.
A wise strategy when it comes to debt is to consolidate – roll all your smaller debts into just one personal loan or a loan with lower interest rate than credit or store cards, for example.
Banks and lenders are mostly always looking to increase their loan book – so keep an eye out for what’s on offer when it comes to consolidating your debt. The loan market is a competitive industry and there are times when lenders will be tripping over one another to offer attractive rates to people like you, provided your risk profile is sound. By that, I mean your credit rating is clean; you have the means to cover repayments – such as equity and a secure salaried job; you’re not an out of control spender or irresponsible gambler; and you’re unlikely to default on them as a result.
So if you’ve got your finances in reasonable shape, consolidating debt before applying for an investment loan is a good move – with a focus on reducing that debt as soon as you can.
If you have an existing home loan, you might already be happy with the interest rate – so it’s worth finding out if you can roll your debts into your existing home loan to free up your borrowing capacity in the future.
What are your outgoing expenses right now?
Lenders also look at your expenses to assess your capacity to repay a loan.
You may think that this won’t be an issue with an investment property because your tenants will be paying rent to help cover the mortgage expenses, but this is not the case.
Lenders are trained to take into consideration the worst-case scenario – what will happen if this applicant’s investment property remains vacant for long periods of time? How will this person in front of me, make their loan repayments then?
Look at your regular outgoing expenses and do everything you can to minimise them. Based on the hundreds of conversations I’ve had with property investors over the years, here are just some of the expenses that they’ve been able to quite easily reduce:
- Regular online and digital streaming subscriptions such as online gaming, Netflix, Stan, Foxtel and the like [consider cutting back to just one streaming subscription makes it far easier to decide what to watch on telly when you get some rest and relaxation time]
- Gym memberships
- Second cars or motorbikes
- Reducing your weekly alcohol consumption [it’s good for your health too!] – rounds of shouts can really drain your disposable income!
- Dining out and takeaway.
Most of us are regularly paying for luxury items we don’t really need, so be ruthless with your budgeting strategies. At the same time, I’m not one for promoting deprivation – just reduction.
What is your total debt capacity right now?
Another thing the lenders take into consideration before approving your investment loan is your capacity to get into more debt. That means that your credit cards could be reducing your borrowing capacity, even if you have a zero balance.
For example, if you have one credit card with a $20,000 limit and two more with $10,000 limits, this will have a considerable impact on the amount of money you can borrow – even if you owe nothing on those cards. In some cases, a lender could take these credit card limits to mean that you have a potential debt of $40,000 against your name! It might not seem fair, but they will often calculate what you would have to repay if you actually used up those limits and add that to your outgoings.
In order to increase your borrowing capacity, it is therefore recommended to cancel the extra credit card and loan facilities that you don’t really need. You’ll also save money on annual fees and this could help to minimise your outgoing expenses, as mentioned earlier.
Are your financial records ship-shape and up to date?
One of the most common reasons why property investors find their borrowing capacity is limited is because they don’t have up-to-date financial information to prove their income and financial position to the lender. Your tax return is the best proof of your financial position and earning capacity that you can provide to a lender, so it is very important to keep them (securely) on file and easily accessible by you.
In many cases, lenders only ask for three or four payslips or bank statements as your proof of income, but this may not provide an accurate view of the bigger picture.
You may also have additional income from existing investment properties, stocks and shares, or even a boarder in your home who pays you weekly board. To be sure the lender can make an accurate assessment of your income and earning capacity, you need to be able to provide plenty of documentation about these other sources of income as well as your regular job.
Read my blog article ‘Hey property investor, how organised are you?’ – it has some good tips on staying on top of all of your documentation throughout the tax year.
How’s your total equity looking?
If you already own a home or an investment property[s], accessing the equity can increase your security position and help you fund another property purchase in some cases with using your cash deposit.
#Property Investor tip: Your equity is the difference between what the house is worth today, and how much you owe against it.
Put simply, your property’s equity will increase both as you pay off your mortgage and as the property’s value grows.
Depending on your financial circumstances, it may be possible to refinance your mortgage to access that money. This will help to increase your deposit amount for your investment property and also help to increase your borrowing capacity. Just ask us and we’ll help you determine if this is the case.
In order to access the equity in your existing property, you will first need to obtain a bank valuation.
You might also want to consider ways to add to the equity in your existing property by making improvements or renovations. This can be a fast way to increase your borrowing capacity, so you can get into your next investment sooner.
“The question many first-time investors ask me is ‘When should I purchase an investment property?’ My mentor always answered, ‘When you can.’ I’ve passed this on to many of my own mentorees making their way in the property trade.”
If property investment is on your mind, why not come and talk to us about our free Discovery Session? Or, come and chat to us if you’re looking to increase your borrowing power before you look at buying an investment property? 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 on 02 9222 9444.
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