Recently there’s been a lot of talk about banks changing the goal posts, making it harder for property investors to get loans.
In fact, there’s nothing new about this.
I remember not that long ago, in the years following the GFC, banks responded by removing many lending products from the market and tightening the reins on lending policies.
While this can be frustrating for investors who are battling stringent requirements to finance their next purchase, there are several ways the astute investor can break through the lending ceiling.
It’s all about serviceability.
If you’ve purchased a property before, you’ll have heard of the term ‘loan serviceability’.
This is the guideline that mortgage providers use to determine whether you’re a safe bet to afford the loan based on your assets, savings and income.
They do this to protect themselves from taking on “risky” loans.
Fortunately not all lenders use the same criteria to determine loan serviceability and this can make a big difference as to how much you can borrow.
I’ve seen the results of a study where 22 different mortgage lenders were given the same borrower information (income, credit card, assets etc).
It showed the amount that they were willing to lend varied between $470,000 to $550,000 – $80,000 difference between lenders!
Clearly, it pays to look around at different lenders.
It also pays to go in forearmed.
While tightening loan serviceability has made qualifying for a loan a little more challenging, it’s certainly not impossible.
So here are seven effective strategies every investor can use to help boost their borrowing capacity and tempt their bank to hand over as much money as possible to fund your investing pursuits:
1. Get your credit cards under control
Credit cards can really work against you in your quest for loan qualification.
Lenders assume that your credit card will be 100% maxed out at all times, which is then counted as debt.
For example, if you have two credit cards, one with a limit of $6000 and another with a limit of $8000, lenders will calculate that as a debt of $14,000.
Even if the balance on both cards is zero!
So if you’ve got unused credit cards, cancel them. In fact, it would be wise to cancel all credit cards except one, and keep the limit on it as low as possible.
This will considerably increase your borrowing capacity with the banks.
2. Be diligent with your financial records
OK, I know not everyone gets excited about financial figures and numbers, but when you’re on the lookout for a loan, it pays to have your paperwork up to date.
It’s all too common for borrowers to be knocked back by the banks because they can’t prove their actual income to the lender.
One simple way to start gaining control over your finances is to complete your tax returns on time. This shows that you’re diligent with your own money management and on top of your financial responsibilities.
Another is to have more information on hand about your income than just your previous two payslips, because just using your payslips may not give an accurate indication of your true income – particularly if your income is supplemented by bonuses or overtime.
And be aware of and track your complete income over each fiscal year to provide a more accurate picture.
Some lenders will be able to use a group certificate or Notice of Assessment from the ATO, too.
3. Be aware that lenders don’t see eye to eye on income
Money coming in is income – right?
Well, not necessarily so, according to some lenders!
You see, not all incomes are treated equally and you’ll find that income accepted by one bank may not be allowed by another.
Dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents are all interpreted differently by different lenders – and some may not even recognise many of these payments as income at all.
It’s worth shopping around because every dollar to your name improves your borrowing capacity. This is where an experienced finance broker can be immensely helpful.
4. Get rid of extra debts
While there’s a warning that comes with this strategy, it’s one you may find useful if you need a little extra to break through the lending ceiling.
The fact is having a myriad of unsecured debts like personal loans and credit cards can send up red flags to lenders.
On the other hand rolling them all into your mortgage makes them ‘disappear’ into one debt, rather than showing up as several financial commitments, and it also reduces your minimum monthly debt repayments.
However, while having a single debt may increase your borrowing capacity, it also means you’ll pay more interest in the long run as you’re paying off all of those debts over a longer loan term. That $100 bag you bought on credit card could take 25 years (and a lot of interest payments) to eventually own outright.
That’s why the only way this strategy can work for you is if you repay more than the minimum off your mortgage each month so you can start to make real headway with paying down your debts.
5. Compare for discounts
Lenders offer varying interest rates and specials on their loan products.
Some will give you a discount for package deals, while others may have a promotional interest rate reduction for a period of time.
Over the term of 30 or so years, even a half a percent can save you tens of thousands in interest, so take your time finding out what deals are available.
Better yet, have a qualified finance broker review the market for you on your behalf!
6. Up-size your savings
For lenders, your loan application assessment all comes down to numbers.
The more “numbers” you have in your account, the more favourably they’ll look upon you.
So, organise your budget and build up as big a deposit as you can. Or pay down your home loan, or deposit money into an offset account so you can demonstrate as much equity as you can.
Even if you’re not yet shopping for a loan, start saving now. It’s a good habit to get into and can only help you later when you start navigating the lending maze.
7. Longer loan terms = less repayments
While most home loans are offered with a maximum of 25 or 30 year terms, a 40-year home loan is still available with some lenders.
A 40-year home loan works in much the same way as those more traditional loans, although with a longer maximum loan term. The main benefit to borrowers who take out these loans is that they pay reduced repayments, as they will have longer to pay it off.
The downside to longer loans is you’ll pay more interest in the long run. Ideally, you would then refinance your loan down the track when you’re in a better position to switch to a 25- or 30-year loan.
Whether you’re an investor looking for a loan, or you’re thinking about your future loan requirements, the bottom line is to investigate differing lenders guidelines and start actively working towards meeting them.
There are many ways to make lenders happy if you’re savvy and knowledgeable about how to boost your borrowing power.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his Property Update blog.