improve my borrowing capacity

While capital growth creates wealth, cash flow is the lifeblood of your portfolio. Many investors buy one or two investment properties and then they’re stuck because their serviceability won’t allow them to buy more properties.

1.    Consolidate unsecured debts into your mortgage
Unsecured debts (credit cards or personal loans) require repayment within a short period, which forces you to reduce your debts quickly. The result is high monthly bills.

When a lender performs their servicing calculations, these debts will weigh heavily against you because they limit the amount of available funds that could be used to make payments on the proposed mortgage.

One possible solution to this dilemma is to combine your unsecured debt with your mortgage so that it won’t be reflected as a financial commitment (automatically increasing your serviceability).

Be advised, however, that should you do this you will pay more in interest than if you had simply paid off your debt.

2.    Reduce excess credit, especially credit cards
Did you know that for every $1000 limit you have on a credit card, your serviceability is reduced by $30.00 per month? So, for example, if you have a credit card with a $10,000 limit – which is not uncommon – the bank will reduce your unallocated funds by $300 per month!

Even if you have a zero balance on your $10,000 limit credit card most banks will count that $10,000 as a liability.

You can immediately increase your serviceability by closing all of your credit card accounts except for one.  If you cannot close them all at once, then work on paying off those with balances until you’re left with a single credit card that suits your needs.

3.    Keep your financial records updated
•    Provide the most up to date information possible on your income levels to your lender.

•    Complete your tax returns on time.

•    Provide information on your entire income, rather than your last two payslips, as this short timeframe may not paint an accurate picture of your capacity to repay.

For example, if your base salary is low, but your employer gives you huge bonuses, this fact needs to be shared with your lender.  Your lender also has an option to obtain a Payment Summary from the ATO to calculate your income for their purposes.

4.    Select the right loan product
This is where a mortgage broker can be worth his or her weight in gold.

Each lender has their own criteria and guidelines; therefore it’s important to choose the right loan for your needs.

Different loan features can result in reductions or improvements to your borrowing capacity. Items like lines of credit, fixed or variable rate loans, and discounts will impact the amount you’re able to borrow.

Note that

7.    Choose your lenders carefully
Each lender has different rules for how they treat income. Some may disregard certain types, such as government benefits, while others accept them.

Remember that the more income your lender is willing to accept, the greater your serviceability.

Furthermore lenders have servicing policies that vary and so this means that some are more generous than others when it comes to borrowing capacity.

Also, note that if you have more than one home loan with the one lender they are likely to ‘sensitise’ the interest across all those loans, which will reduce your borrowing capacity.  If on the other hand you spread them around you can easily stretch this borrowing capacity especially if you know which lenders to use first (the less servicing friendly ones) and which to use for later

8. Save…and then save some more!
This is one of my favourite strategies because it’s easy to implement and doesn’t require anything more than effort on your part.

Save at least three to six months for the deposit on your loan or if you’re using equity, build up as much as possible before getting your loan.

Finally, careful planning and determination to pay down your debts – both secured and unsecured – is a fool proof way to increase your serviceability with little to no risk to your financial freedom.