Property investment is not just about finding the right market or property. It’s also about utilising the banks’ money smartly to grow your wealth.
As an investment property buyer’s agency, we are lucky to meet thousands of property investors with various lending attitudes or preferences. We noticed that some behaviours are common but not really helpful for investors if they want to build a portfolio fast.
Today we’re going to talk about 3 of them.
I. Keeping many unused credit cards, believing they don’t matter.
Credit card limits are not debts, but they are liabilities. Banks take your credit card limits into account when calculating your borrowing capacity. Below is an example showing how much difference your credit cards can make to your borrowing capacity.
You make an annual salary of $130k and plan to buy your first investment property, which can generate $500/w rental income for you. We assume three scenarios of your credit card status:
• Scenario A – You have two credit cards, each with a $10k limit ($20k total).
• Scenario B – You have only one credit card with a $10k limit.
• Scenario C – You don’t have a credit card.
Let’s use CBA’s Borrowing Power Calculator to find out how much you can borrow in each scenario.
Each $10k credit card limit makes approximately a $60k difference in your borrowing capacity – You need to save for many more months to achieve the same purchasing power that you could achieve with just one less credit card.
Therefore, it’s wiser to review your credit cards and reduce your limit as much as possible to maximise your borrowing capacity.
II. Being loyal to one bank
Many investors use the same bank for everything financial in life, including housing lending. Loyalty is always deemed as a noble character, but when it comes to lending, it may not benefit you.
With different banks, you get different results. Usually, your bank may not offer you the best deal or the highest borrowing amount.
For example, lending policies.
• Different banks may calculate your serviceability based on various assessment rates. One bank may use 3% above the actual interest rate, and another may adopt 3.5%, which would cause a big difference in your borrowing capacity.
• Different banks look at your income and debt differently. If you receive flexible income such as bonus, allowance, rental income, etc., some banks may just consider a % of them just to be safe, and that % differs from bank to bank; If you are on an IO loan and currently just paying the interest, some bank may assess your borrowing capacity based on your current monthly repayment, others may use your repayment amount after your IO period, which would be much higher.
Another example is the difference in valuation results. Bank valuations don’t affect your borrowing capacity but could affect the equity usable for your next purchase. A typical property investment strategy is to use the capital gain of your current properties as equity in future purchases. Therefore, the higher your current properties are valued, the more equity you can unlock, and the easier you can buy your next property. However, each bank would give its own valuation result – usually different from each other – for the same property. It’s essential to order multiple valuations and pick the best result.
*InvestorKit conducts annual portfolio reviews with our clients and works with their brokers to order 3-4 valuations for their properties for FREE so that our clients are always up to date with their properties’ performance and make timely decisions to scale the portfolio.
III. Thinking that your borrowing capacity = Your borrowing capacity last time – The amount you have borrowed
Some property buyers go to their bank/broker, getting to know that they can borrow up to $800k, so they borrow $600 to buy a $750k house and think to themselves, “That’s it. I have only $200k left to borrow. I can’t buy anything unless I get a significant pay rise”.
However, that’s not the case. Your borrowing capacity is not calculated just based on your salary. The next time you approach a bank, they will assess your borrowing capacity based on your salary income & living costs and:
a. The overall gearing of your current property/ies
b. The rental income you’re receiving
c. The gearing of your proposed property to buy
Each time you come back with a new property, your borrowing capacity is calculated all over again. Below is an example based on CBA’s Borrowing Power Calculator.
Assuming that your borrowing capacity for your first investment property was $761k (as shown in the below chart), and you borrowed $500k and bought a $600k house; Now, a few months later, your salary and living costs are the same, and you’re thinking of buying your next property. Is your borrowing capacity $761k – $500k = $261k?
No. Your current rental income, expected rental income, and loan repayment are all NEW to the bank, and they’ll give you a NEW calculation result – $358.4k, which can easily afford you a $400-$450k house.
Playing around the Borrowing Power Calculator, you’ll notice that your expected rental income influences the calculation results. So, setting a healthy and reasonable yield target for your purchase and finding the right market that offers that yield level is helpful to increase your borrowing capacity and also benefits your cashflow post-settlement.
Investors can make many “mistakes” or unfavourable choices around lending – Credit limits, choice of lender, calculation of borrowing capacities over time, and many more. That’s why we always suggest investors have a good lending professional on their team.
In the meantime, a responsible buyer’s agent, like InvestorKit, who provides the market research to support your borrowing and investment goal, and takes proactive actions to ensure your portfolio plan is achieved as fast as possible is another key to success. Would like to buy your next investment property with such a buyers’ agent? Talk to us today by clicking here and requesting your 45-min FREE no-obligation consultation!