Heads Up, Investors! Here’s How to Increase Your Borrowing Power

Property investment appeals to many Australians as it can be seen as an extension of the ‘Great Australian Dream’. With the recent solid property prices across Australia, it’s understandable that not everyone will have the spare cash lying around to purchase an investment property outright. Those looking at sourcing investment finance may be curious about how they can increase their borrowing power when applying for investment loans.

If this resonates with you, keep reading as we provide our top four tips for increasing your borrowing power as a property investor in Australia!

Firstly, what is borrowing power?

As the name suggests, borrowing power (or borrowing capacity, as it’s also known) refers to the maximum amount of money that you may be able to borrow from a lender. Many factors influence an individual or business’s borrowing power, including income, existing debt, financial commitments, debt-to-income ratio, open credit accounts and credit history.

How does an investor calculate borrowing power?

When calculating borrowing power, it’s important to keep in mind that your borrowing power is typically subjective, given that each financial institution and lender will assess your situation slightly differently based on their loan products and credit assessment criteria.

Generally, to gauge your borrowing capacity, you must first have a good understanding of your:

• Annual income
• Total expenses per year
• Current debt obligations (including their credit limits) and other financial commitments
• Credit score
• Existing assets
• And your debt-to-income (DTI) ratio

These are the primary factors that influence your lending capacity, however, the interest rate and loan term of the loan that you’re looking at also plays a role in determining your serviceability and, therefore, your borrowing power.

A borrowing power calculator is a good place to start when assessing your capacity to take on an investment loan.

How can investors improve their borrowing power before buying an investment property?

If you’ve used a borrowing power calculator and want to understand what more you can do to improve the results, the good news is that there are several actions that prospective investors can take to help improve their borrowing power. We take you through our top four below:

Increase surplus income

1. Increasing how much you have left over after you deduct your expenses from your income may feel easier said than done, however, being scrupulous with your budget can help improve your borrowing power. Small costs (such as bank fees) can slip out of your account from under your nose. Reviewing your bank statements to understand where the opportunity exists to help increase your surplus income is a good step.
2. If you have an existing home loan, chances are that your home loan repayments have increased over the past two years thanks to rises in the cash rate. One option is to consider speaking with a home loan specialist to check that you’re not paying more interest than is necessary on your home loan repayments!
3. The same is true for any other debts that you have, including credit cards or a car loan. You may even consider if the opportunity exists to earn any other income!

Clean up your credit history

This perhaps goes without saying that your borrowing power can be seriously diminished if you have a poor credit rating holding you back! Taking prudent steps to help improve your credit history, such as paying credit accounts on time, ensuring that you don’t utilise 100% of your available credit limit, and disputing any errors on your credit file, can go a long way to boosting your borrowing power.

Consider using an existing property as security

One of your loan structuring options when financing an investment property may be to utilise the equity in an existing property as security against the new loan. This strategy may potentially improve your borrowing power by lowering the lender’s risk, however, there are pros and cons of using an existing property as security. It is important to seek personal financial advice to understand the full impact of leveraging the equity in an existing property to invest.

Speak to specialist investment loan brokers

Speaking to investment loan brokers may help you use your borrowing power’s full potential. They can help factor in the potential rental income of your investment property, access multiple lending products and access competitive interest rates.

Bear in mind that a run-of-the-mill broker may be ill-equipped to assist if you’re looking to invest in a property outside of the traditional residential property market, such as a commercial premises or NDIS property.

Do I have enough borrowing power to invest in an SDA investment property?

Specialist Disability Accommodation properties offer an investment opportunity unlike any other properties in the Australian market. Specialised properties like SDA homes often require specialised guidance and finance. To estimate how much you can borrow based on your current financial situation, speak to the team at Apollo Investment.

Our panel of industry experts can assist you through the full process, from design and finance to SDA enrolment and management — start the conversation with Apollo Investment to understand if borrowing to invest in the life of an Australian with disability is in your power!

FAQs about borrowing to invest in property

We answer some commonly asked questions about borrowing to invest in property.

What is the difference between a home loan and an investment loan?

A home loan typically refers to the mortgage on a home you live in. This is often referred to as an ‘owner occupier’ loan. An investment loan, on the other hand, is designed for investment purposes. The loan terms, interest rates, and structure may differ between home and investment loans.

Is the interest rate different for investment loans?

Typically, interest rates are different for home loans versus home mortgages. Commonly, investment loans are initially offered under an ‘interest-only’ structure, meaning that your monthly repayments don’t pay down the capital of the loan amount but only take care of the interest repayments.

This is helpful to comfortably afford an investment property in the beginning, however, while your repayment amount is only calculated on the interest charges, effectively the loan balance isn’t being reduced.

Do I need to pay stamp duty when I buy an investment property?

You may need to pay stamp duty on your investment property, depending on your personal and financial circumstances, the property value, and which state or territory you purchase the property in.

Will I need to pay lenders mortgage insurance on an investment property loan?

Lenders mortgage insurance (LMI) helps provide protection to lenders against borrowers defaulting on their loans. Typically, LMI is required for property loans when the total loan exceeds 80% of the property value.

What is a comparison rate?

A comparison rate is a standardised percentage that includes both the interest rate and most other costs associated with a financial product (including home loans and investment loans). It helps consumers compare the true cost of different financial products more accurately.

Can I claim an investment property’s expenses on tax?

You can generally claim tax deductions for expenses related to an investment property in Australia. Accessing professional advice around taxation that takes into account your complete financial position is required to understand more about the tax implications of your investment property.