Tips to improve borrowing capacity when buying property

Banks look at two things when it comes to lending. They look at how much capital you are putting up (% lend) and they look at your serviceability (your income and how you can service the loan).

With these two variables, there are a number of strategies investors can implement to bolster their chance of gaining finance. We shall split it off into the two criteria as most people have issues with either one or the other when it comes to getting finance.

Your capital:
– increase the deposit for your property.
– use your parents as guarantors for your purchase
– buy properties that is not deemed risky (in the banks’eyes)
– farming land, apartments smaller than 50 sqm, commercial property, etc…
– do a joint venture with your business owner friend who has plenty of capital but no financial statements to back his/her serviceability
– buy a new principal place of residence with minimal deposit (as little as 5%) and then convert it into an investment property after 6 months
– use the strategy above with a newly developed property and take advantage of the first home owners grant, use as little deposit as possible and control the property for the long term (my personal favourite)
– acquire investment properties that may be able to get subdivided, apply for a development approval to do so and hey presto, you have soft equity you can use to purchase another

Your Serviceability:
– get a better job (higher salary)
– increase your income with investments such as fixed income funds or shares that give out interest payments or dividends to bolster your ability to service the loan
– buy an investment property instead of your home as the rent from this property is taken into consideration
– bring others into the deal (be it family or friends who have incomes)
– buy a less expensive property that the banks think you can afford to pay off
– ensure that you have Income Protection insurance so that the banks can sleep easy with your lend (banks like people who get insurance)

There are a whole range of options that people can utilise. As you can imagine, you can chop and change all of these points to customise it to whatever situation. The key to this game is to know the rules and play by them to the best of your ability. If you don’t know them, find someone who does and learn as much as you can from them!

Property is a very powerful asset class to have in your portfolio. Unfortunately, there are plenty of pitfalls along the way that most do not even know nor care about. It may be too late for some and that’s when huge lessons are learnt. Do your research and ensure you have the right people to talk to. Who knows, your best move may be to stay well away from more property purchases!