With industry changes making it harder for investors to grow their portfolios, is it now more important than ever to have access to a larger panel of lenders and seek professional advice.
To better explain, let us give you a basic example of what affordability looks like in reality, versus how most lenders will now calculate your maximum borrowing power:
| Loan Amount – Interest Only
|
Actual
Repayments |
Lenders Calculated
Repayments @ 7.25% |
| Investment 1 Loan $500,000 @ 4.79% | $1,996 | $3,021 |
| Investment 2 Loan $450,000 @ 4.39% | $1,646 | $2,719 |
| Investment 3 Loan $320,000 @ 5% | $1,333 | $1,933 |
| Investment 4 Loan $650,000 @5.2% | $2,817 | $3,927 |
| Total Liability | $7,792 | $11,600 |
As shown above, the lender is calculating all existing mortgage repayments as if the interest rate was to rise to 7.25%, even if the current interest rate is fixed and not subject to change!
Now let’s look at rental income on the same four properties:
| Loan Amount – Interest Only
|
Actual
Rental Income |
Lenders Calculated
Rental Income less 20% |
| Investment 1 | $2,080 | $1,664 |
| Investment 2 | $1,885 | $1,508 |
| Investment 3 | $1,300 | $1,040 |
| Investment 4 | $2,708 | $2,166 |
| Total Income | $7,973 | $6,378 |
Here the lender is reducing rental income by 20%. This is generally to allow for all other associated costs, such as Agent fees, rates and repairs.
Let’s see how the overall monthly results compare…
| Actual | Lenders Calculated |
|
| Total Liability | $7,792 | $11,600 |
| Total Income | $7,973 | $6,378 |
| Surplus Cash/Negative Cash | $181 | -$5,222 |
Based on investment income versus liability alone, the lender is showing a monthly loss of -$5,222 per month, when the borrower is actually receiving a positive surplus of $181 per month! This can make buying another property MUCH more challenging!
However, there are still ways you can help improve your serviceability to overcome this deficit:
- Compare lenders with lower assessment rates and more favourable policy
- Work overtime or take up a second job
- Close credit cards or reduce limits
- Consolidate high interest incurring debts
- Issue rent increases on existing properties where possible
- Move in with friends/parents temporarily to lower your rent and/or to rent out your owner-occupied home
- Downsize/sell non-appreciating assets to free up more cash and/or to reduce loan repayments
- Use a guarantor or increase your deposit and lower the loan amount needed
- Purchase with a family member that can assist with increasing your overall income
- Look at purchasing investment properties with a higher yield to assist with positive gearing
OR: If getting the finance to buy a property isn’t an option yet, maybe look at other ways to grow your portfolio:
- Get a smaller equity release and complete minor renovations that will increase the value of your property
- Convert an outbuilding into a granny flat to increase the rental income and overall yield on the one block
Whether your goal is to buy 3, 4 or more properties, keep in mind that even though regulations have made things tougher for investors, there are still ways you can create wealth and increase the value of your assets within your property portfolio.
If you need more help with understanding how, or just some tailored advice, then please give us a call as we would love to assist!