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.
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? 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.
Lenders also 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 above.
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.
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.