There’s little doubt banks have tightened their lending criteria in recent times. It can be frustrating for those looking to get into the market and for investors who struggle to source finance for their next deal. Here are some ways investors can increase their borrowing capacity.
BY JAMIE MOORE
Remove/reduce credit card debts
Many borrowers don’t realise the bank takes their entire credit card limit into consideration when assessing their borrowing capacity. Therefore, if you have a large limit, which isn’t being utilised, consider reducing it to a lower limit. If you have credit cards that you don’t use consider getting rid of them.
Consolidate debt
Another way to increase borrowing capacity is to consolidate debt. For instance, rolling a personal loan into a home loan will remove this monthly liability, which is usually charged at a higher rate and paid out over a shorter term (and therefore has higher monthly repayments). However, it’s important to note that by consolidating this consumer debt into your home loan, you’re likely to pay more for this debt in the long term if you simply just make the minimum repayments.
Restructure current loans
If you currently have loans set up as principal and interest, you might want to consider converting them to interest only instead. Extending the loan term may also help.
Find a more competitive product
Having a competitive product will reduce your monthly repayments, which ultimately enhances your borrowing capacity.
Fixing loans
When assessing your borrowing capacity, most lenders will add an additional 1.5 per cent to two per cent to the variable interest rate of the loan that you’re looking to take out (they may even apply this to loans you hold with other lenders). On the flipside, if you were to opt for a fixed loan, which are (currently) less than variable rates, then some lenders will assess your capacity on this rate (or this rate with a small increase of around 0.5 per cent). This can make a significant difference to your borrowing capacity.
Look at other lenders
Not all banks are the same when it comes to determining your borrowing capacity. Some only take into account 75 per cent of the rental income you receive while others use 100 per cent. Some load the interest rate on loans you have with other financial institutions while others don’t.
Increase rents
Have you reviewed your rents recently? Is there anything you can do cosmetically to the property that will boost the rent you can command? It goes without saying higher rent means more money in your pocket, which means improved borrowing capacity.
Correct structure from the start – use a good broker who deals with investors
Brokers who understand property investing, lender policy and importantly your longer-term goals will be strategic in their approach to sourcing finance. This often involves spreading your loans across lenders and saving the more generous (in terms of maximum borrowing capacity) lenders until last, when you’re getting closer maxing out your borrowing capacity.
This information is of a general nature. Please always consult taxation professionals about the specific nature of your situation.
Jamie Moore is the owner of Pass Go Home Loans, a mortgage broker firm specialising in sourcing and correctly structuring finances for property investors across the country. www.passgo.com.au
