Buying to your Budget

A #borrowingcapacity a lot of the times is confused with a ”purchase price”. Many people assume they have to use the top end of it. Sometimes, that may be required, in others, it won’t and splitting it could help you diversify the portfolio. In this episode of ”The Board” I go over a few important points to consider when thinking about your borrowing capacity.

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When thinking of property investment people assume I’ll go get a pre-approval. What can I borrow I’ll go to that. Now in some cases that range might be quite tight to have no choice but to go to that because that’s what’s going to get you that right asset. For others, the range is huge and they assume that it needs to be one purchase to make up that 1.2 million dollar property range.

Now when you think about it, this is also partly a reason why people go into a scenario and often get stuck with their borrowing capacity. They get a range. They go “Great, that’s what I can buy” they max out that range, sometimes they forget cash flow and sometimes they forget that their incomes may or may not change for the many years ahead. For some it has and they can control that new borrowing capacity, but for others it hasn’t. So when considering your purchase, I think it’s really important to note that a “Borrowing Capacity” doesn’t mean a “Purchase Price”. It’s just one equation and you can look at it in so many different ways. If you have a 1 million dollar borrowing capacity you can start saying ”What was that a 700k home – buffer leftover – money I can put in a way in a bank account and also expenses that I feel comfortable with”. Or is it a 1 million dollar usage but across two properties. Or is it a 1 million dollar usage for the whole property? And if you are going at that whole property, is it a house that maybe has lower rental yields, or is it multi-dwelling properties that actually had the higher rental yield and you can sustain that debt fairly easily.

Now in borrowing capacity the good news is there are some limits put in place to protect you. Example, Assessment rates. Simply put, a rate above the lending rate or what you’re measured on. Example, say 7% but then maybe today’s interest rates of 4% or three and a half. That gap is basically covering you in the case that interest rate rises at 7%, you always knew and the bank knew that you could cover it based on what you’ve declared as your income and expenses.

Other things to consider are around the living expenses and how they’re looked into. Other things to consider around, debts that you owe and how the debt actual is calculated like is it a 20% loading. By that meaning, if you have a thousand dollars owing as a repayment each month, maybe the bank considers you to have a $1200 repayment each month with a 20% debt loading.

So there’s so many different calculations that come apart of it that might already be risk protecting you but some may not – depending on who you go to. So from that perspective don’t think that buying against your limit is always a good idea. It could be, it may be the only choice, doesn’t always have to be one property, it can be multiple. From that perspective having that finance strategy in place and having the right professionals around you – from your buyer’s agent, advisors, and mortgage brokers or bankers will really help you put the pieces together based on what you want to do.

The last thing to consider as well is your limits may change based on how much cash you have. Because 1 million dollars in buying limit (borrowing wise) doesn’t always mean you can buy a million-dollar property. Because where’s that deposit going to come from? Where’s that stamp duty going to come from? Where is that professional fees going to come from? So in doing that, really consider that as your overall journey.

That’s it from us here in InvestorKit, The Experts in Wealth Creation, helping you take action.