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You’ve saved a solid amount, your current investment(s) have been growing well, and you’re planning for your second or maybe third property. Everything seems to be on track, but somehow, the momentum slows. You are unable to borrow enough. The banks say no. What gives?
You’re not alone. Many investors hit a ceiling after buying their first or second properties. Often, it’s not the market that holds them back but how they’re borrowing.
In this blog, we’ll unpack three sneaky lending traps that quietly limit your portfolio growth and reveal practical tips to help you avoid these traps. Let’s dive in.
Trap 1: Going directly to a Bank Instead of using a Strategic Broker
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Let’s say you walk into your usual bank to get a loan for your second property. They know you, got your account and gave you your first mortgage; why not stick with them?
While it can be an easy option, going directly to your usual bank means you’re missing out on better choices. Why?
- Because banks can only offer their loan products, you could end up with less flexible loan terms, lower borrowing limits, or even higher interest rates.
- Banks don’t prioritise strategic structuring for your long-term growth. They’re focused on getting you approved now, not setting you up for your third, fourth or fifth property.
- Additionally, many banks have internal policies that restrict how much they’ll lend you based on your existing loans with them.
A Solution: You can avoid this trap by partnering with a savvy mortgage broker who understands property investment, not just basic home loans. A good broker helps you access better lending options, structure your loans for long-term growth, and maximise your borrowing capacity, saving you time and the hassle of doing all the research yourself.
A Tip: However, not all brokers are the same. A pro tip is to ask your broker how they plan to structure your portfolio over the next 5 to 10 years. If they can’t give you a clear answer, it’s time to shop around.
Trap 2: Choosing the Wrong Entity or Ownership Structure
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“Should I buy in my name, through a trust or set up a company?” It’s a question every investor runs into, and no single answer fits all. However, choosing the wrong structure can shrink your borrowing power or create tax headaches, such as paying more tax and missing out on CGT discounts.
This is because when assessing serviceability and risk, lenders treat each structure differently. Trusts and companies are often viewed as higher risk, so banks tend to be more conservative. They might “shade” (discount) the income, meaning they only count a portion of it or apply stricter criteria.
A Solution: If you’re unsure which structure to opt for, sit down with your broker and accountant. It’s essential to choose a structure that supports your long-term investment strategy while striking a balance between tax efficiency and borrowing flexibility.
A Tip: Keep in mind that what works for one investor might not work for you. Their financial situation (including income, tax bracket, goals, etc.) may differ from yours.
Trap 3: Overlooked Liabilities and Income Issues
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You’ve got a good salary and a solid deposit, so getting a good loan should be straightforward? Not always. When applying for a mortgage, banks don’t just look at what you earn but dig deep into what you owe and how your income is structured. This includes your full credit card limits, your loans and the consistency of your income. These hidden deductions can reduce what you can borrow.
- Credit card traps: Even if you have zero balance on a $20k credit card, most banks will still assess 3% of that limit, counting it as your $600/month debt. That $20k limit you barely touch could prevent you from borrowing another $50k to $100k.
- Personal debts: Banks don’t just count your actual repayments; they add a buffer to be extra cautious. If you’re paying $500 a month on a car loan, some banks might assess it as $650 with a 30% buffer. That extra loading reduces your borrowing power, even if you’ve never missed a payment.
- Not all income is structured equally: Bonuses, commissions, rental income, and self-employed earnings are often shaded by lenders. Even if you bring in strong income on paper, the bank may only count a portion of it.
A Solution: Before applying for your next loan, take time to clean up your liabilities. Lower your credit card limits (or cancel unused ones), pay off personal debts and be tactical about how your income is presented. If you’re self-employed or have variable income, team up with a savvy broker who knows how to position your finances for maximising serviceability.
In a nutshell,
Investors may think the most challenging part of investing in property is finding the right market or securing the best deal. But if your lending doesn’t support your portfolio growth, even the best property won’t take you far. It’s like driving a car with only half a tank of gas. You’ll speed off at first but then stall out if there isn’t enough fuel to keep you going.
So, take your time to:
- Structure your loans to support your long-term goals.
- Work with an expert broker, not just any broker. The proper guidance can unlock better lending options and save you years of slow growth.
- Select the optimal ownership structure by conducting thorough research or consulting with a reliable broker and/or accountant, ensuring it aligns with your investment strategy.
- Clean up your liabilities and be strategic about how your income is presented to strengthen your borrowing power.
This blog is inspired by the podcast These Lending Traps Will Kill Your Portfolio Growth! featuring our Head of Research and Founder of InvestorKit, Arjun Paliwal. Check it out for more insight!
Wish to scale your property portfolio with smart lending strategies? At InvestorKit, we not only focus on securing high-performance properties for you but also build a strategic plan that helps you reach your long-term investment goals. Would you like to invest like a pro and accelerate your portfolio growth? Get in touch today by clicking here to request a free, no-obligation 15-minute discovery call!