How to increase your borrowing power

With interest rates at record lows and property values experiencing steady growth, property investment is now one of the most popular ways to build wealth for your future and retirement. But getting the financing in place to fund your wealth building plans can be a hurdle. So how can you increase your borrowing power to help you take advantage of current opportunities? In this article we take a look at some of the things that banks and lending organisations take into consideration before approving your investment loan

Minimise your existing debts

One of the first things that lenders look at when assessing you for an investment loan is the level of debt that you are already 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 have to make, you can help to increase your borrowing capacity when the lender makes an assessment.  If possible, it’s a good idea to pay off as many of these debts as you can before you submit an application for your investment loan. Another strategy might be to roll all of your smaller debts into just one personal loan or a loan with lower interest rate than credit or store cards, for example. 

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. Talk to us and we will help you to determine if this is an option and if it will have the desired effect on your capacity to borrow for an investment property.

Minimise your outgoing expenses

Lenders also take a look at your expenses and use these to make an assessment of 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 take into consideration the worst case scenario – what will happen if your investment property remains vacant for long periods of time? How will you make your loan repayments then?

Take a look at your regular outgoing expenses and do everything you can to minimise them. Do you really need that expensive gym membership? Could you make do without that second car? Could you cut back on your pay TV subscriptions? Most of us are regularly paying for luxury items we don’t really need, so be ruthless with your budgeting strategies.

 Reduce your excess credit limits

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.

Keep your financial records 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 on file.

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. If you are self-employed, or have a low base salary but earn commissions or bonuses for example, a few payslips or statements alone will not accurately convey what you actually earn and this may reduce your borrowing capacity or make you ineligible for the best interest rate deals.

You may also have additional income from existing investment properties, stocks and shares, or even a border in your home. 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.

Access the equity in your existing property to increase your deposit

If you already own a home or some investment properties, accessing the equity can help you secure finance for another property purchase. Your equity is the difference between what the house is worth on today’s market, 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. 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 – and you can also add in any reduction you have made to the mortgage from your repayments. 

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 an accurate valuation from a reputable valuations expert. We can help you with this so don’t hesitate to ask us for assistance! The lender will also obtain a proper valuation, so this is an important step when you are considering accessing your equity. 

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.

Don’t wait to get started with your property investment plans!

If you’re thinking about making a property investment, why not come and talk to us about strategies to increase your borrowing power before you start the buying process? 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.

ABN 62 953 405 689, Australian Credit Licence Number 391715

Tips for paying off your mortgage faster

Did you know that the faster you pay off your home loan, the less money you will have to pay in interest? By putting some proactive strategies in place to get your home loan paid down sooner, you could really save yourself some money! If you’re keen to make some serious headway on your mortgage debt, here’s a few tips that could help you get ahead.

Pay fortnightly instead of monthly

One of the easiest ways to pay down your mortgage faster is to make your home loan repayments fortnightly instead of monthly. If you get paid fortnightly, you’ll find this is an easy and convenient way to make your repayments – and there’s no need to pay more money to make a big difference. Just by splitting your mortgage payment in two and paying more often, you could cut years off your loan term and save a lot of money in interest.

How does this work? There are 26 fortnights in a year, but only 12 months. By paying fortnightly, you will be effectively making the same as 13 monthly repayments every year – paying more without making an impact on your budget. Over a 30 year loan, this could shave up to 4 years off your loan term and also save you some interest over the life of the loan.

Make bigger repayments

In the first few years of your loan, most of your repayments will go toward paying the interest rather than paying down the loan itself. This is just a quirk of the way compound interest works, but by making bigger repayments, you’ll be paying more off the loan itself and thereby reducing the amount of interest you have to pay. Over time, this can help to significantly shorten your loan term and save you even more money.

It might be a good idea to make your loan repayments at two or three percentage points above your interest rate. This will not only help you pay off your loan sooner, if you’re already paying at the higher level, you won’t be in for a shock if interest rates should rise in the future.

If your budget won’t allow you to repay at a higher interest rate, consider what you can actually afford to add to your repayments. If you can only afford an extra $100 a month, then go ahead with that for now. Every little bit helps and you can always increase your repayments when your circumstances improve. 

Make the most of low interest rates

Our interest rates are currently at all-time lows and lenders are offering some very competitive rates and home loan packages. If you’ve had your home loan for a while, talk to us about the possibility of re-financing to get a lower rate. If your circumstances have improved since you first took out your home loan, this could also help you get a better rate.

Many experts are predicting that interest rates will fall even lower in the foreseeable future. If this happens, it’s a good idea to continue paying at the higher rate even if your interest rate falls. Again, this is a strategy for attacking the principal of your mortgage, which saves you money on interest and can significantly reduce your loan term.

Use any lump sums to pay off your mortgage

We all get little windfalls from time to time, but instead of squandering them on stuff you don’t need, consider the advantages of paying them off your home loan! Not all loan products will allow you to make extra payments, so talk to us to find out if that’s an option on your particular loan.

Any extra payments you make on your mortgage reduces the loan principal and that means you’ll have to pay interest on a smaller amount. So if you get a tax return, cash birthday present, or sell that second car, if it’s possible to do it, then whack the money down on your mortgage to give yourself the best gift of all.

Consider using a mortgage offset account

Many variable rate home loans can be organised with a mortgage offset account as a benefit. Using an account like this could help you put any extra cash to work on your home loan – even if you don’t want to use it to pay off the home loan itself. 

A mortgage offset account is simply a savings or transaction account that is linked to your home loan. The more money you have in your offset account, the less interest you have to pay on your home loan. For example, if you have a $300,000 home loan and keep $10,000 in your offset account, you only pay interest on $290,000. 

This is often considered a good way to put the interest from your savings to work for you. If you kept your savings in a regular savings account, you would have to pay tax on the interest it earned. By putting that money into a mortgage offset account instead, you can save on tax and pay down your home loan sooner.

Don’t have a lump sum of money right now? You could be saving yourself money on interest simply by having your salary paid into your mortgage offset account. Because you can use it like a regular transaction account, it won’t affect your budget. By doing this, you may only be saving a small amount of interest each month, but over time it can make a big difference.

Remember, your home loan is one of the biggest financial commitments you’ll ever make. It is important that you continue to manage your mortgage over the life of your loan – just set and forget for the next 30 years is no way to get ahead! It’s a good idea to talk to us regularly to ensure your loan product remains the very best one for your needs and personal circumstances.

If you’d like to talk about your repayment strategies, or if you think it’s time for a home loan health check, then please don’t hesitate to give us a call. We’re here to help you make the most of your finances and reach your financial goals sooner.

ABN 62 953 405 689, Australian Credit Licence Number 391715