Together or separately?
Q My husband and I have been borrowing together for all the five properties we bought. I was told by a broker that we should have been borrowing separately to boost our borrowing capacity. Which one is a better strategy if we are to buy more properties in the future?
A Buying properties separately, in theory, could work to one’s advantage if,as an example, one borrower had a great income and no or minimal properties in their name, while the other partner had many properties solely in their name. This could work with some lenders as the borrower would then show minimal expenses compared to their partner.
However, in most cases, couples buy investment properties jointly,and buying in your name only canwork against you. This is because when you are married with children you may borrow by yourself; however,the lender still sees your wife/husband/children as a liability on your application, which now greatly increases your expenses in the eyes of the lender – and all this without your partner’s income. So in many cases your borrowing capacity may end up going backwards. Circumstances vary greatly between applicants, so it is definitely worth engaging a mortgage broker who specialises in property investing to assess your matter and compare various scenarios to see which one willmaximise your borrowing capacity.
Bear in mind that even though some lenders allow this set-up, it can be dangerous. Employing this strategy may see you borrowing beyond your means to repay the debt. Careful planning is necessary to consider your budget, cash buffer, risk management,and overall property strategy to ensure you can weather the storm should interest rates rise or your property become vacant,etc.
Over 50's investors
Q My wife and I are real estate investors in our mid-fifties. We have excellent net worth, as we have paid off our million-dollar home and are currently earning a six-digit employment income. We’ve also been loyal customers ofour bank for over 20 years.
We currently have four investment properties, each of which was financed by our bank at great rates and terms. We’d like to buy our fifth investment property so we went to the nearest branch of our bank to apply for a loan.
To our surprise, the bank declined the application. Nothing in our credit or employment had changed. We were putting down a 20% deposit from our own savings,and the property was top-notch and in excellent condition.
In fact,the bank asked us to sell one of our existing properties in order for them to approve our loan application for the fifth property. Of course, we’re not happy about selling when we didn’t plan to.
We were told that the reason the bank declined was because we’d already maxed out our lending capacity and therefore couldn’t qualify for the amount we needed.
How can we get around this? We felt let down because we’ve been loyal to this bank for decades,and this is how they repay us! Could you please explain how banks calculate the maximum amount they lend to a customer?
A You raise a very good question for real estate investors in their mid-fifties. Many lenders now have an ‘age policy’. For anyone 55 years orolder they reduce the lending term to a maximum of up to 75 years of age,which of course is 20 years. This shorter lending term affects your capacity to borrow money as the repayments work out to be larger than,say,working it out over a 25-year period. Not every lender has this policy, but your ability to borrow will come down to you needing a much larger income versus your expenses.
There are many people who say they have been “loyal customers for many years”. This type of thinking may greatly reduce your ability to borrow money,since you are likely to stick with your current lender, hoping they will reward you. In reality,they have their internal calculators,and if your current situation does not fit their model then most likely you will not have a favourable outcome. In the meantime,another client of the same bank, in a similar situation to you, is researching all the other major lenders for a solution with possibly better terms.
Don’t be afraid to change lenders. Today the financial market is very flexible for changing your financial structure. For example, there are no more penalty exit fees for variable rate loans if you refinance with another lender. Most lenders are happy for you to stay with your existing banker due to wage deposits, automated bill payments,etc. Simply set up an automated payment from your existing bank account to pay your new investment loan.
It is not surprising that your lender has declined you for further finance for a fifth investment property. There are a number of factors to be aware of. Firstly,every lender will have a threshold as to their willing exposure to an individual who already holds numerous property loans with them. Secondly, one of the biggest factors to be aware of is that when you apply for your fifth property loan with the same lender they will likely add an interest rate buffer not only on thenew loan you’re applying for but also on all of your existing property loans, thereby severely affecting your borrowing capacity.
Using the same scenario, if you leave your four property loans with your existing lender and apply for your fifth property loan with another lender, they will most likely only apply a buffer on your new loan (for borrowing capacity purposes) and take all of your other loans at their actual repayment. This is a huge difference in calculating your borrowing power and will most likely provide you with a favourable result compared to your existing lender.
In order to make this strategy work,you would simply take out a split loan with your existing lender against one of your existing properties to cover the deposit and closing costs. And then you could take out, for example,a 90% lend with a new lender.Thereby you will bekeeping all the loans and properties separate.
Not all lenders are the same. They differ greatly in how they assess your financial mattersand ultimately determine your borrowing capacity. They can assess your income in many different ways,depending on whether you are PAYG, self-employedor a contractor, have commission income or bonus income,etc. Every lender has a different policy and appetite in terms of these income structures and therefore determines how much they will allow into their calculation.
Rental income is an important factor in helping a property investor borrow money. Did you know some lenders will only use 70% of rental income while another lender may use 100%? This alone can be a huge factor if you own multiple properties.
Some lenders will add a rate buffer of,say,1.5% on any new lend, whereas other lenders mayadd this same buffer not only to your new loan but toyour entire loan portfolio. Again,this has an enormous effect on your borrowing capacity.
Credit cards are also overlooked. For every $1 you have in your credit card limit,your borrowing capacity diminishes by $4; for example,if you have an overall credit card limit of $25,000 your borrowing power will drop instantly by $100,000.
It is imperative to shop around and research as many major lenders as you can to determine your borrowing power, the overall cost of the loan,along with the right structure to effectively borrow money to suit your needs. A lack of research could cost you tens of thousands of dollars in the long run or,worse still, stop you dead in your property tracks.