Assuming you have set your game plan of creating wealth via property investment, below are the 4 tips you can use to boost your borrowing power based on the DSR (Debt Service Ratios) lptipformula we discussed last week.

The tips below are based on the principle of either boosting what is considered your accessible income income or by reducing your total loan repayment commitments, both of which vary from lender to lender.

Tip #1 Find the lender that favours your income type

Apart from the usual PAYG income you may or may not earn, other income types can include but not limited to the following:

  1. Casual income
  2. Commission income
  3. Bonus income
  4. Rental income
  5. Childcare maintenance income
  6. Allowances
  7. Income from dividends

Different lenders treat different income types differently, and some lenders may exclude certain income types altogether. So while there is no doubt you deserve every penny you have made despite the income type, you will not borrow the same amount of money depending which lender you talk to. The key point here is that you need to identify the source of your income and align yourself with a lender who would ideally include all your income sources when assessing your serviceability.

Tip #2 Consolidate your short-term debts into your long term debts

This is to reduce your monthly and annual repayments and decreasing your total annual loan commitments in terms of lowering your actual monthly and annual loan repayments. Transfer all your short-term debts such as store cards, personal loans, car loans and credit cards into your mortgages.

Let’s say that you have a typical car loan of $50,000 and the interest rate is 10%.

Type of Loan Total Loan Amount Annual Interest Rate Monthly Repayments
Car Loan $50,000 10% $1,064

The monthly repayment of $1,064 will be used by the lender to calculate your borrowing power.

Now watch the monthly repayment drop when refinancing it via an interest only mortgage over 30 years.

Type of Loan Total Loan Amount Annual Interest Rate Monthly Repayments
Car Loan $50,000 5% $208.33

As you can see, the monthly repayments drop instantly from $1,064 to $208.33 per month and that could mean a difference of $50,000 in terms of your borrowing capacity.

I know what you might be thinking now “…… but if I change my car loan to a 30 year home loan, I will end up paying a lot more than $50,000 for the car, that doesn’t make sense.. “

The way I look at it is that if you don’t get rid of the bad debt for the car, which is an asset that is diminishing in value every day, you will never be able to raise enough money to buy an investment property, which is a good asset that appreciates in value and could be worth 20 times more than your car in 20 years.

Tip #3 Reduce your credit card limits based on your spending requirements.

Some of us might have multiple credit cards with high limits and that can severely restrict your borrowing capacity. The lenders always calculate your credit card debt based on the credit card’s limit, not on actual balance regardless how much you use every month.

If you don’t need the credit cards, then reduce the limit, or even better, cancel them.

Tip #4 Use multiple lenders to build your property portfolio

When you are applying for multiple loans with the same lender, the bank uses their benchmark rate to calculate your borrowing capacity. That is, they convert an interest only loan into principle and interest and add 2% – 2.5% on top of the advertised rate.

However, when applying with two separate lenders, the new lender will take the actual loan repayments of the existing loan to work out our maximum borrowing capacity.

Assuming you want to apply for a $500,000 investment loan and already own your home worth $600,000.

Scenario 1: All loans are with the same bank.

Existing home loan of $600,000

+

New investment loan of $500,000) X Bank benchmark interest rate based on principle and interest

($6000,000 + $500,000) x 7% = $7,318 in monthly repayments

 

Scenario 2: Loans are with different banks.

Existing home loan of $600,000 x 5% (which the new bank will take the actual repayments at 5%)

+

New investment loan of $500,000 X Bank benchmark interest rate based on principle and interest

$6000,000 x5% interest only = $2,500 in monthly repayments

$500,000 x 7% = $3,534 in monthly repayments

Total monthly repayments: $2,500 + $3,534 = $6,034

As can be seen from the scenarios above, you save $1,284 in monthly repayments by spreading your loans with different lenders, and that means you can borrow more money, and thus secure more property faster.