I’ll use the example of property, simple because that is my chosen asset class and that is what I understand the best!
It’s a little known fact, that your success as a property investor has a lot to do with your understanding the way to keep getting finance. If you understand finance you can keep playing the game. Just like monopoly, only in real life!
So let’s look at this closer. Do you know what your borrowing power is? In simple terms, it’s a rough calculation of how much you can expect a lender to provide you for a house purchase, based on your current income and existing financial commitments – and your finance commitments are measured at a higher interest rate than they actually are.
The better shape your finances are in, the bigger your borrowing power will be: a decent savings account balance, low credit card debt and limit and strong savings history will all fall in your favour.
And obviously, the greater your borrowing power, the bigger and better your investment portfolio gets.. So as a property investor, it’s in your best interests to do everything in your power to improve your financial situation.
Banks have different ways of assessing how much individuals can borrow, meaning your borrowing power could vary by as much as $100,000 between different lenders. Engaging the services of a mortgage broker can help you choose the right lender for your situation, so you can maximise your borrowing potential.
Oh, and before I go further… I am NOT a financial adviser and this is not specific advice! What I’ll detail below are tips that I have learnt on my investing journey. But don’t take it as gospel, before you jump into anything, make sure you talk to a mortgage broker.
These are the strategies that I have implemented to make my money work as hard as possible for me…
Cut your credit card limits
The bigger your credit card limit, the less you’ll be able to borrow on your mortgage, it’s as simple as that. It was reported that as a guide, having a $5,000 limit on your card can equate to up to $25,000 being shaved off your borrowing power! That is huge!
Personally I only use credit cards where I must i.e. online purchases, car rentals and the likes. So I have a minimal limit on my card to get by. And notice the word limit! It’s not even about how much you have to repay on there, it is just about the fact that you have access to unsecured, high interest credit!
If you do use your credit card, make sure that you repay it each month in full.
Get your personal debts in order
This is a must! So to help you, and get my system, watch the Let’s Get Debt Free presentation.
Unsecured loans are a big no-no in the eyes of banks, because not having a particular asset as security means that they have to go after you to recover the debt should you not be able to manage your debts.
Even debts that are against depreciating assets, like cars, boats and other toys (which I rather call a liability anyway) are affecting your borrowing power for investing.
Remember that the fewer debts you have overall, the greater your borrowing potential will be.
Clean up your credit file
A clean credit record can be a powerful ally in helping to boost your borrowing power, so make sure you know what your credit file says about you. Obtain a free copy from Veda Advantage.
All sorts of things can go on your credit file that can limit you from borrowing. Even things like applying for loans/mortgages that you in the end chose not to take out. The banks check these, however may not know the reason the application didn’t proceed and they just assume the worst!
You need a budget to demonstrate your financial situation. Lenders want to see clear records of your earnings and outgoings as any extras that go towards your income, such as family tax benefits, can help boost your borrowing power. It’s also important to show evidence of any assets that you own.
Not to mention that if you can show understanding of your finances they feel much better about giving you money.
Stay in your job
That is if you are in one now! If you are about to jump into your new business you may not be able to get finance for up to 2 years.
Banks take into consideration the level of stability and security your personal situation represents. This means that if you can show the banks a clear record of your employment history, it can boost your borrowing power by demonstrating your reliability.
Save the largest deposit possible
A higher deposit translates to greater borrowing power, because the lower your loan to value ratio (LVR) is, the lower your monthly mortgage repayments – hence, the more you can borrow.
If you have assets in place already, there may be a way around this. But I’ll discuss that with you later.
Get the right advice
Mortgage brokers can be an invaluable resource when it comes to maximising your borrowing power. They can help coach you and smooth out your risk profile and because they know all the nitty-gritty about different loan products and various lenders, they’ll be able to help you make the right choice for your individual needs. And they can test the waters for you without getting a credit application showing up on your credit file!
Whether you’re buying, browsing or you already own property, we recommend that you meet with a qualified mortgage broker for a financial health check so you can work out exactly where you stand with your current loans and finance arrangements.
You need to make sure your broker is experienced in working with property investors, so they will know what to look for in terms of loans that will suit you now and in the future. A good finance broker will not only crunch the numbers and ascertain your borrowing power based on your current situation, but they’ll also be able to:
- Take into account your goals and investment strategy
- Create a “Bank Plan” that accounts for this property deal and future potential purchases
- Give advice on strategies you could use to improve your situation
- Forward-project the figures and sums for different property purchase prices.
But you have to know what and how to ask for, as they are not necessarily forthcoming with this information.