How to Improve Your Borrowing Capacity & Debt Strategies for 2025

This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome to 2025 with the Property Nerds, 14th of January here, and it's all popping off at InvestorKit and at Fareka Financial.

New year, new me, is it, Jack? What's happening? That's the one. Mate, it's good. It's good to have a break.

Yeah, just I think 2025 is just a good time to refocus, learn from last year, try to set goals for this year, and yeah, work out a new budget, try to buy an investment property, and yeah, got a whole bunch of tips on how to improve your borrowing power, how to pay down your debt sooner, certain things that you might, like certain opportunities with your existing situation that you could implement to really free up some capacity and really, yeah, allow yourself to keep growing that portfolio. Well, mate, what did you get up to in the new year break or Christmas break, by the way? Absolutely nothing. Chilling? Proper chilling?

Definitely needed a two-week chill, nothing at all. Just spend time with the kids and chase after them and yeah, trying to toilet train the two-year-old, but yeah, that's pretty much it. That's cool. That's cool. Look, our new year's break for many, like you said, finances on the mind, people probably being deep in the goal setting.

I know Christmas break for me, I was like goal setting, head down, thinking about where I want to take 2025. Obviously, 24 was a crazy year for me with everything, personal health, all that sort of stuff, but mate, 2025 is looking good and from a perspective of like just attacking it this year, what's going to be some big new things for you? What's some focus areas for you, personal, business? What's the thoughts? Yeah, well, I think with everything that's lining up for 2025, I think the business is going to see significant growth.

I think starting early, late 2023, the business started and since then, we've got 20 odd employees from just a small team of about four or five. Massive. And I think that's just, it's going to be much the same in terms of the growth. So excited for that. In terms of what I want to implement today, November, December, those years, those months in terms of spending and the household spending, absolute nightmare for most people, right?

So I think January comes and you're kind of licking your wounds and trying to build up your savings. It's a really good time to look at your household expenditure and try to see if you can reduce some expenses here or there. And from a lending capacity point of view, there's certain expenses that you could kind of look at to really maximize your borrowing power, which we're still having some issues with that. Rates are still where they are. And as we start to see rates come down this year, hopefully, you're going to see borrowing power come back.

So if you want to just wait for that to happen, by all means, do that. But if you want to start to change your existing situation to speed up that process, to get in ahead of everyone else that are just waiting for the rates to come down, then a few things that we can touch on today. So a big one, private health insurance, right? That is something that, you know... It's not getting any cheaper, man.

I speak to some people and they're like 20, you know, mid-20s and he's paying like $450 a month on private health. I'm like, what are you doing? Is he getting ready for like a turkey treatment, all the teeth getting redone or something like that? I was like, seriously, mate. New hair job as well?

I'm curious. Tell me why you're spending that much money on private health. He's like, oh, I go to physio like two times a month. I was like, yeah, cool. What, 50 bucks a session?

You know, like the math is not mathing. So generally when you... But is it that expensive? I know it's expensive for like in the 30s and 40s and different like kids and all that stuff, but 20s? Yeah, you don't need it.

Honestly, you don't need it. Someone must have gotten a killer commission or something like selling him with the... This is the greatest package of all time. You know what it is, man? I think it's just an education thing.

So it's kids that were on their parents' private health their whole life and then they come off their parents' private health and they think that they've got to just get back on something. Just get it, okay. So I find that it's a lot of that. So what's it do on the borrowing capacity front? What's that making a difference?

So people have heard us talk about HEM, right? HEM is the expense that a lender would attach to your household based on your total income and the household as well as the amount of adults and dependents that are in that household. So they're going to have a minimum HEM figure that they're going to attach to you, right? Then there are things that are outside of HEM, which are elective things that you don't usually... It's not like groceries and food and stuff like that.

There's a tolerance for banks on those types of expenses and that they can fluctuate during the year. But private health insurance is something that is outside of HEM and that's something that's going to... It's just going to reduce your borrowing power flat straight out. So they're going to chuck it into HEM now? No, it's still outside of HEM, but that's because it's outside HEM.

It's straight categorized expense. It's just an expense that is going to straight up reduce your capacity whether you like it or not. So review that, right? All around, do you actually use it? What are you actually using it for?

Start to look at ways that you can save a bit of money there because that's going to have a direct impact on your capacity. Absolutely. And look, I mean, also just weigh up. If you don't have it, maybe it's time to take it up, right? Yes, we're talking from a capacity perspective, but also just considerations.

I've got a quick story to share on the whole health insurance. So my wife and I got health insurance and like, man, admin, I've just realized how crazy admin can be. Not on a business front, we've got that covered, but just on the life front. Life admin. Yeah, life admin, especially all my business owners out there, I bet this hurts you the most.

You get so much focus on the customer's care, your team's care, the business care, you don't care about yourself. Dude, I know that so well. You know what I mean? Even people that are in property and finance industry, so say a buyer's agent, for example, trying to do a loan application to buy themselves a property, right? They'll put 10 clients before their own life admin.

That's it. And so even when buying, people think that as a buyer's agency owner, I must have the best properties timed at the best times. I get so busy getting our clients in there, I get my properties last. Like for example, we were purchasing for so many clients in Adelaide in 2019. We saw the signals.

We saw 2018, the signals. We said something's going to change here, goes on to be the best performing capital city for the years after. But I got in in 2021 because I was just too busy doing everything for someone else. And I was like, oh, I better do something. This is going to run away from us.

Fortunately, we got some good growth. But back on the health front, same thing happened. We thought we had health insurance all covered. Everything's going good. And then all of a sudden it lapses.

And we didn't know that. We thought we'd got it covered. Bank accounts left, right and center. That's another thing. Property investors, if you're tuning in here, get your bank account sorted.

Get that right. If you can get those structures right. And I'm going to put out some content in the future regarding that. But when you don't have that right, things slip. It slipped for us.

And we're excited to have Ruby, our first daughter. Not last year because now it's 2025. 2023, September 28, she's born. We're like, yeah, we got health insurance. Out comes the short print.

You need to have it for this long in the waiting period before you get pregnant. And obviously, the spices or the mystic Indian stuff was flowing pretty well. And all of a sudden, pregnancy happened a lot sooner than expected. And no go. We had to out of cash everything for that first one.

And then get this. My brother's going now for the second child. And they forgot to tick the box for having the cover for your baby. And so now, that's like one kid for me. And then now we've got the second on the way.

We're prepared. April end for the second one. Baby boy coming up. But then for Ankit, my brother, who's our head of tech at InvestorKit, he has the first child fine in terms of health insurance. Everything's there.

But then on the renewal, they forgot to get the coverage there. So, yes, borrowing capacity. I get you, Jack. Definitely review it. But just get your admin and life stuff sorted because getting that wrong, it's not cheap, especially when we're living in Bella Vista.

Bella Vista is a good spot for a hospital. So, they charged an arm and a leg, that's for sure. The other First class ever in our life. And even business, we held it off for many, many years until we could do that regularly and it was within our means. But there was a Qantas special with Emirates and their partner airlines, 350,000 points under classic rewards plus $2,000 for a return first class ticket to Dubai.

First class, dude, it was nuts. It was nuts. But I get it, it's a bit overhyped if you're paying cash. Was it Emirates? Yeah, Emirates.

It's way overhyped if you're paying cash because that's 22,000 to 24,000 cash ticket, right? But if you get it for 350,000 points and $2,000, you do the math and you go, all right, you know what, I'm going to get a calculator now because I need to math this math. If I go 350,000 and say Amex charges me 2%, 2. 2%, that's $7,700 in fees. And 2.

2 might be conservative, by the way, might be lower than that, plus the $2,000 in the cost of the extra because it had plus cash, which is all the taxes and stuff. That's 9,700 for a $24,000 ticket. That's mental. But only if it's that. And 100% agree with you, you do spend more on the card because I know that behavior.

Now I'm thinking about it. You go to a cafe, you're like, tap, tap, you just do it. And you're just like, hakuna matata, you just walk out, you're all good, you don't even think of it. So I agree, man, with the credit cards that it does hurt unless you're a strict points guy, gal, and you're onto it. But even then, you don't need it.

And that credit card limit is going to directly impact your results in your property portfolio. It just is. Another easy pickings, paying off personal loans. There's no reason to have a $20,000 personal loan and you've got $100,000 in cash. Pay off your personal loans.

It's rubbish debt. A lot of people listening to this and a lot of higher income earners have novated leases. It's a car loan. It's just a sexy way of saying it, right? It's a car loan and it is definitely impacting your borrowing power.

And it's actually worse than a car loan when it comes to a lender's assessing the borrowing power. Because when you're doing what we talked about was HEM expenses, right? In there, you'd have car expenses. You'd have like petrol, insurance, and all that. That's all factored into that.

But you're also still, when they're looking at the novated lease repayments, they're taking that off your income. And in theirs, it's double dipping the car expenses. So it's a bloody car loan. I know there's still a fee attached to it, a pretty heavy one. And why?

If you have the means to own that car outright, or if you don't, then you just downgrade your car. Are you really that type of car person that you want to have this big novated lease and this fancy car? Okay, that's fine. But it is going to have a significant impact. And in some cases, a lot of cases, it stops you from getting that next property.

So what's more important to you? Is it the car or is it another property? And it's temporary, right? It's not like that sacrifice is going to be there forever. You're just trying to get that next place or that next place after that.

And you can always come back to get that car once you've got your places. Because we all know getting a car loan is easier than getting a home loan. So you can always just go like temporary sacrifice. I remember 2019 or 2020, my car was worth a grand. I kid you not.

That Pajero, remember that one? Yeah, dude. I want to go back to that because I did the whole car thing. It felt good for like a day, but it's just not worth it for me. I know some people like cars and I know you've got families and that.

But right now, we've got like a $10,000 car, Mitsubishi. It's like a family car. And I want to even downgrade from that just to make a point. I want my old 2009 Mitsubishi Lancer, the manual. I want to go find the person I sold that to and get that back off them.

You want to get a forearm workout with the window, right? You want to get the window going up and down and everything. No, seriously, man. Not a fan of cars. They just depreciate.

And yeah, just very hard to make money on cars. You know, on that note of cars, I know this isn't regarding borrowing capacity alone, but it's just the thought of cars. This is just me. So I am humbly and gratefully going to say this, like that I'm in a position where I can go and get the Lambo, go and get the Rolls Royce, all that stuff. And I humbly say that.

But I don't choose to, I choose not to get it, not because of a financial decision also. Because like that would be like me BSing if I said, oh, financial savvy decision, I don't get it even though I can and can get it comfortably. I actually also have a psychological reason for not getting it. And this might help people also for those who are about to go through that. I'm getting a cool car phase.

There is nothing material in this world that you get and you love forever. Like hands down, I can guarantee it. If people ask you, do you like it? Do you regret it? You just put face on and go, oh, I love it.

No, I don't regret it. Oh, it's brought me so many memories. BS. I reckon once those friends are gone and they're not in front of you, you might have a moment where you scratch your head and think about it. Do I really?

You're just telling yourself a story. It is just human nature that once you have something in your position, the shininess goes off over time. You have that car that's epic. You drive it once, phenomenal. You go to a racetrack, you rent it, phenomenal.

You're in a new country, stay there for two days, amazing. You live in that country for a week or two, you want to go home. Or you drive that car every day. It's not the same feel anymore. Like physical material things, there's just something there.

And the same goes with certain experiences, not all certain experiences. If you jump off a bungee the first time, nuts. You go 10 times in a row, how are you feeling now? So look, there might be a few, I'm not speaking for everyone, but the majority of people out there, you're not going to love it as much as you think. And having tested a few of these things in other parts of life, not necessarily cars, just a side note to people, beyond the borrowing capacity.

Again, I feel like Jackie's hard on the borrowing capacity and I've been going, you know, I have another view. The game of finance, mate. Yeah, look, I don't think as many people that see the cool cars, see them and love them, you won't love it a few months in, a few years in if you've got different thresholds, but you'll wear off. You'll keep trying to chase the next thing. Another good one, paying off a lump sum off your own occupied debt, right?

It's non-deductible debt. If you have a bit of cash laying around, because like some people, they'll have a decent sized loan on their own occupied property, but they'll also be sitting on a decent amount of cash and they think, oh, it's sitting in my offset account, it's reducing my interest. Yeah, that's great, but it's also, there's a limit attached to that loan that the lender's doing it. They're doing their assessment based on the actual minimum repayment, not about the interest and how much you're offsetting, because you could spend that cash anytime, right? So by actually paying down that own occupied debt and reducing the limit, that reduces the repayment.

So that's going to have a pretty big impact on your borrowing power. And especially when you do like a debt recycling strategy and cash the money back out as an investment, then it's investment debt. So that, yeah, a lot of people can find value in that because, yeah, you might not know what you're sitting on. Yeah, you're reducing your tax deductible and reducing your non-deductible, increasing your tax deductible if you use that money. And like, that's where people sometimes, you know, they limit themselves.

They only talk about offset versus redraw. You can have like, why just those two? Both. You can have both. Like you can go, let me put it into the loan so the loan comes down.

Let me pull it back out and put it into an offset and separate the loan. Yeah, I'm going to save a lot of people some money right now because there's a lot of courses out there of people saying, oh, pay your home loan off in five, seven years. They go full heavy on it. And what you just said is basically it. The money goes, your earnings go straight into the redraw facility and all your money comes out of your offset account, goes in and out of your offset account, but you use your redraw as like another savings account because the whole idea around it is that it's psychological.

If you have to spend money and take it out of your redraw, it's like you're spending it. You see your home loan balance actually reduce when the money goes in there.