APRA ACROBATICS – HOW INVESTORS CAN INCREASE THEIR BORROWING ABILITY
Last year, APRA introduced tough new lending restrictions that pushed banks to tighten serviceability requirements for their investor loans. By discounting income and increasing affordability benchmarks, deposit-taking institutions have effectively slashed the borrowing power of both new and seasoned investors. For many, this has meant their investing journey has come to a halt, while others have been forced to downsize their aspirations for the present. Depending on your situation as an investor, there may be certain strategies you can utilise in order to increase your borrowing power and continue on your investing journey. I spoke to Tim Wong, Finance Manager for Zinger Finance, about some of the measures investors can take in order to increase their borrowing ability keep themselves in the game and on the road to financial freedom.
LAYING THE FOUNDATIONS RIGHT FOR INCREASED BORROWING ABILITY
If there is anything investors should keep first and foremost in their minds when applying for finance it is this: your broker has the ability to either make or break your investing journey. The right mortgage broker will assess your financial situation along side your goals as an investor and help you find the right lenders and the right structure to support them. It is important to ensure the first loan you take out doesn’t restrict your borrowing needs in the future, says Wong.
A trusted mortgage broker will also partner with you throughout the course of your investing and educate you about your options as a borrower – particularly in the case of changing regulations.
If you have become stuck due to the APRA regulations, or you simply need some clarity around the issue, it is recommended that you speak to your mortgage broker. If you think you are with the wrong broker, you have nothing to lose by seeking a second opinion. The guys at Zinger Finance are experts in obtaining finance for property investors and have a proven track record at helping investors build their portfolios.
BE OPEN WITH YOUR BROKER
Wong says, it is of utmost importance to give your mortgage broker an accurate picture of your financial situation from day one. “Sometimes people might think it’s going to help them if they leave a credit card off, or they may be getting a pay rise and use their future income instead of their current income,” he says. It is better to give them “the full picture,” he says, so they can “help you to make decisions best for your situation.”
If you have chosen the right broker, who knows the ins and outs of your finances then you are off to a flying start. They will be able to present the best options available to you and help you choose the right way forward.
NINE STRATEGIES TO INCREASE YOUR BORROWING POWER
If you would like to present your best self to the banks, there are several ways you can maximise your borrowing capacity. The following strategies may help to improve your serviceability, however it is important to remember that due to the diverse nature of investors and their situations/strategies, there is no one-size-fits-all approach. In making any financial decisions, investors should always consult their success team first.
1) PAYING DOWN EXTERNAL DEBT
How it can help
“Paying down external debt, or, consolidating debt, can help manage your outgoing repayments,” says Wong. When assessing external debt, most banks now look at the amount of your principle and interest repayments in order to calculate your monthly expenses – even if you are paying interest-only repayments. They also calculate your repayments at a higher interest rate than what you are actually paying. This has severely reduced the borrowing power of many investors. By paying down your external debts, you are reducing your assessable expenses – while also showing the banks that you are in control of your finances. You may also like to consolidate other types of debt, such as that of personal loans and car loans, into your home loan debt, where it will be subject to a much lower interest rate.
What about your credit card? Do you spend your entire limit each month, or do you fall well below it? “A lot of lenders, regardless of how you actually use your card, will make an assessment based on the limits in place,” Wong says. He says, investors can improve their serviceability by reducing their credit card limits in order to reflect actual spending.
Who it can help
Paying off or consolidating external debt can help any type of investor – whether established or just starting out. It can also help to improve the borrowing capacity of non-investors looking to get a foot in the door.
2) FILING YOUR TAX RETURNS
How it can help
If you have fallen behind in lodging your tax returns you may be setting yourself up for failure with the banks. “If you are self-employed, your tax return is basically the evidence of your income,” says Wong. A lot of lenders now employ a cut-off point for determining whether your tax return reflects your current income, prioritising returns from the most recent financial year. If you are self employed and you haven’t kept up to date with your tax returns, you have no way of proving your income to prospective lenders until you are up-to-date.
Wong also says, while some lenders only require your most recent tax return, other like to see your tax returns from the past two years. “If your most recent year is going to show a higher income than the preceding year, then it pays to have the most recent one available,” he says.
What about claiming investment deductions in order to reduce your tax burden? If this has reduced your taxable income to the extent where it affects your borrowing capacity, it is wise to discuss your options with a trusted accountant.
Keeping up to date with your tax returns also means you have documented evidence of how much rent your existing properties are earning, as well as any other types of income you may have made over the past year.
Who it can help
This is useful for anyone using tax returns to prove their income, such as the self-employed. It is also useful for those renumerated on a PAYG basis but who also earn rental or other investment income, such as dividends from shares.
3) BUYING AND FLIPPING THE RIGHT KINDS OF PROPERTY
How it can help
Buying and flipping is a strategy that may enable you to generate equity as cash without any associated ongoing debt. You could then use this cash to pay down your existing debt, or better your position in order to expand your portfolio. It is essential to be extremely careful when executing this strategy and weigh up its benefits against its risk to see if it will work for you. Make sure you talk with the team at BInvested before deciding to buy and flip, so you can get their advice on what is best for your situation as well as which types of properties to aim for.
Who it can help
Well established investors and those who have enough capital to cover the costs of the project.
4) MAXIMISE RENTAL YIELDS
How it can help
Maximising the amount of rent your properties are earning can better the income assessment made by lenders in order to determine your serviceability. If you are negatively gearing, maximising rent will reduce your losses. This is even more relevant now that the APRA restrictions have changed the way banks look at negative gearing. “Previously, some banks may have taken into account a negative gearing component in their assessment of your borrowing capacity,” says Wong. “Now, that negative gearing component may be a lot less or may have been removed altogether.” If you are unsure whether to negatively gear or positively gear, it is important to discuss the pros and cons of both options with your accountant/tax advisor first, says Wong.
In order to optimise your portfolio and maximise your rental earnings, it is essential to stay on top of your property manager. A good property manager will have a good understanding of the optimal rent you can charge by staying informed of any market conditions that may impact rental value. But a not-so-good property manager may do nothing to make sure you are getting the best rent for your properties.
Who it can help
In a general sense, maximising rental returns will benefit all investors. For those investors who want to use rental income to boost their serviceability, maximising rent is a sound option.
5) BUYING UNDER THE BEST NAME
How it can help
If you are investing in partnership with another person, it can be useful to buy under the best name in terms of serviceability. This may include buying under a trust or a self-managed super fund. Different lenders have different serviceability restrictions around this. Having a discussion with your mortgage broker or lender will help you determine the best name to buy under, says Wong.
Who it can help
This approach may help couples who earn different levels of income to one another, as well as “people who are in the position to set up other borrowing structures,” such as family members, etc. says Wong.
6) RENTING IN FAVOUR OF BUYING YOUR OWN HOME
How it can help
Rather than buying your first home, it may be more beneficial to continue renting and buy an investment property instead. Wong says, when renters apply for a home loan, most lenders will take into account that whatever rent the individual was paying will be replaced by their mortgage repayments. These repayments may be further stress tested in subsequent applications whereas rent usually isn’t. Also, if a renter applies for an investment loan, an investment property earns rent of its own, “the addition of rental income could help your serviceability,” says Wong.
If you are taking out an investment loan rather than a home loan, this enables you to make interest-only repayments rather than principle and interest – reducing your monthly mortgage expense. It is important to remember, however, since the APRA regulations came into effect, most banks have set their investment loans at a higher interest rate to their home loans. “A good, qualified broker will be able to do the sums for you in order to work out the pros and the cons,” says Wong. This will help you to identify which of the two options will benefit you the most.
Who it can help
First-time investors who cannot afford to buy a home in their area may instead benefit from investing in a high growth area elsewhere. Home-owners may also benefit from moving out of their principle place of residence and into rental accommodation if the former will earn high rent.
7) REFINANCING
How it can help
If the conditions of your current loan are not benefiting your investing, refinancing in order to reduce your interest rate, change your loan structure or extract more equity is an option you may wish to consider. Any decision to refinance needs to come from a certain goal or purpose, says Wong. “There should be a very clear reason for why you need to refinance and the choice of the new loan and the new lender should match up to what it is you’re trying to achieve,” he says. Having a detailed discussion with your mortgage broker will help you determine whether refinancing will be beneficial to your circumstances and help you weigh up the pros against the cons.
Who it can help
Refinancing may help those who feel their current loans are restricting them in a significant way – whether it be restricting access to equity, or they are feeling the pinch and would like to reduce their repayments. It may also benefit those who wish to turn their home into an investment property, or those who would like to change their loan structure.
8) FIXING YOUR LOAN
How it can help
Fixing your loan, or a portion of it, may help to protect you against rising rates. Before deciding to fix your loan, however, it is important to go over the pros and cons of this approach with your broker or lender. Fixing rates for a fixed term may prevent you from accessing equity in order to purchase more investment properties and incur high breaking fees if you decide to change things before the end of the term.
Who it can help
Investors who are happy with the size of their portfolio and who want to secure their repayments at a lower rate. This may be a useful tactic for couples about to embark on parenthood, or people facing job insecurity.
9) GET INTO THE NITTY-GRITTY
How it can help
It is important to be savvy with your loans. Having the right mortgage broker is indispensable because they will keep you informed about all the technical things you can do to boost your borrowing power, such as setting up offset accounts and making weekly repayments. They can inform you if it is better to refinance at a lower interest rate or fix rates for a set time. Being on top of your game as an investor means being smart with your finances and having a broker who you can trust.
“People need to take a much more holistic approach to their finances,” says Wong. Previously, a lot of investors would “zero in on good interest rates,” or choose a bank based on the size of its branch network. Nowadays, says Wong, there are many factors investors need to consider. “As an investor you are looking to maximise your borrowing capacity and try to put in place the right loan structures,” he says. “Be prepared to be flexible – typically, you may be with one lender, or you may need to be using different lenders.” The right mortgage broker should be able to identify which lender is best for your first, second and third purchase, and which lender is best for your fourth, fifth and sixth purchase, he says.
Who it can help
A good mortgage broker who can share his or her technical know-how will benefit all investors. They can set up the right structures for first-timers as well as rethink the borrowing structure of established investors.
Zinger Finance is a member of Vow Financial Pty Ltd Australian Credit License Number 390261
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