As we saw in Good Debt vs Bad Debt, borrowing money isn’t always a bad thing – in fact, it can be a marvellous way to build your wealth if used wisely. And, for those of us who can’t buy houses from our free cashflow, its a way to secure funding to enter the property market. Now unfortunately (or perhaps fortunately), since the GFC the banks have gotten a lot more skittish when it comes to loaning money, and the Australian Prudential Regulation Authority (APRA) has imposed a lot more controls around bank lending for investment purposes.
For a quick recap of the GFC, there is an awesome video below from Crash Course Economics.
This means that its more important than ever to get your ducks in a row before seeing your bank or mortgage broker to seek finance.
Follow these simple tips to maximise your borrowing power.
1. Reduce your credit card limits
Did you know that when you’re being assessed for finance, lenders will assume that all of your available credit is fully drawn? – they don’t just factor in the amount owing on your credit card(s). If you have $20,000 in available credit across 3 credit cards, consider reducing your cards down to 2, or better yet, 1, and reduce your limit to the minimum you require. Be sure to pay off your card IN FULL every month. Credit card debt is just about the worst debt you can have (unless you’ve gotten in deep with the mafia – in which case, please don’t call me for financial advice).
2. Keep an impeccable credit history
There are a couple of companies out there that keep tabs on your finance & credit history, and give you a ‘credit score’. Equifax (previously Veda) is the major one and is used by banks or lenders use to assess your suitability for credit. There is a full breakdown of the factors that influence your score here, however in summary:
- Pay your bills on time (duh)
- Seriously though, even if Telstra sends you $2,000 mobile phone bill for global roaming that you dispute, pay the bill, then fight the good fight afterward… withholding the payment on principal will damage your borrowing power more than the value of the bill.
- Don’t apply for credit from a whole bunch of different lenders. Research, yes, but apply, No. It is better to have $20,000 credit with one lender than $5,000 with 4 different ones.
- Dont apply for more credit than you need – when Mr Master Card calls you and says congratulations, you’ve qualified for an increased credit limit, tell him to go jump!
- Don’t go bankrupt (i know, i know… i’m starting to sound like a complete killjoy)
- Don’t have any court judgements against you (like that old tenant of mine who broke lease, disappeared and thought he got away scott free)
- Don’t move registered business address, or residential addresses too often.
To find your credit score, visit the following link. If its not ‘good’, or ‘very good’. Read over the equifax factors that can affect your score and address them. https://www.getcreditscore.com.au/
3. Reduce your living expenses
When the bank asks you to fill out a form detailing your life expenses, don’t tell them that you have a massage & a facial once a week, or about the ‘fine wines’ club membership that sets you back $200.00 a week. Ditch your expensive luxury habits for a few months (because bank statements don’t lie) and if (and only if) you must, re-introduce them after you’ve begun financing your new debt and know that you can comfortably afford it. Or perhaps, before you re-start your luxurious spending habits, you should read about good debt vs bad debt.
4. Don’t Hide Income!
No one likes to hand over a portion of their hard earned income to the tax man, so some of us (rather than pitch in for things like roads, schools & hospitals) may decide to keep some of that income on the quiet. That plan might work out wonderfully for you for a few years, but one day, you’re going to go and ask the bank for a loan for a house….
“Hi Mr CBA, i’d like a loan for a house please. I’m done with renting and throwing money down the drain – its time for me to become a home owner. I’ve saved up $100,000 so if you’d be so kind, i’d like $500,000 so i can bid at auction next week for this property that wifey and i have fallen in love with”…
” John, i’d love to help, but your last three tax returns say that you’ve made $18,199 – exactly $1.00 below the tax free threshold. Based on this income, we can loan you…. let me see… $0.00″.
“Hang on, $18,199 isn’t my real income, you see, i’ve been breaking the law for all these years and….well…aaahh…ummm”
This one is gonna bite you on the backside, so help pay for some infrastructure for a little while, make your tax return look good for the bank, and get yourself that loan.
5. Make sure your paper trail is up to date.
If you haven’t filed a tax return in the last 3 years, well you don’t have much evidence now do you? Make sure you keep solid financial records. Tax returns, details of other loans, credit card statements etc. The lender is going to want them, so a) make sure you have them, and b) make sure they look good!
6. Choose Interest Only Repayments (Investment property)
Now this one warrants some extra explanation (which i’ll cover in a separate post), but suffice it to say that if you are only paying back interest on a loan, your repayments will be much smaller than they would be if you were paying back Principal & Interest. You don’t get much choice if its your ‘Principal Place of Residence’ (PPOR) cause the banks want you to have some skin or ‘hurt money’ in the game. However, with investment loans, you can choose to only repay the interest. The table below gives an example of the difference in monthly repayments between a Principal & Interest (P+I), or Interest Only (I.O) loan of various amounts.
| Interest Rate | 5% | ||
| Loan Term (Years) | 30 | ||
| Loan Amount | Monthly Repayments (P+I) | Monthly Repayments (I.O) | Diff |
| $250,000 | $1,342.05 | $1,041.67 | $300.39 |
| $500,000 | $2,684.11 | $2,083.33 | $600.77 |
| $750,000 | $4,026.16 | $3,125.00 | $901.16 |
| $1,000,000 | $5,368.22 | $4,166.67 | $1,201.55 |
7. Borrow before kids
Now this is controversial, but the fact of the matter is that ‘dependents’ will drag down your borrowing power. Banks and lenders don’t have anything against children per se, but if those children have a cost attached to them, then the banks / lenders will factor in that cost when calculating how bigger loan you can service. So the way i see it you have a few options… a) send the kids down the mine to pay their way…. b) become a ‘cat lady’ (or man) – banks don’t ask you about pet dependents, or c) *just consider your timing when applying for loans – a loan application between your 1st and 2nd child will stand a much better chance than once number 2 arrives and joins the family.
So, if you’re planning on seeking finance for a first home, an investment property, or just another one to add to the portfolio consider these tips and tricks to supercharge your borrowing power.
Feel free to use the contact me link if you have any questions, or if you’re in the process of getting ‘market ready’ and need to secure finance.
* Banks consider the cost of dependents for good reason… they do actually cost money. Make sure you see a financial planner and do your numbers before considering how much debt you can comfortably service.