How to Improve Your Borrowing Capacity

What’s my borrowing capacity?’ is the question I get asked several times a day.

Each bank has their own unique policies and special calculator to assess both your income and your ability to service your existing and any proposed loans.

It’s our job (not yours) to navigate this. The minute you provide us with our 1-page Personal Details form, before we look at values or interest rates, we immediately calculate the following:

  1. If we refinance your existing loans, how much extra can we provide as an Equity Facility? (or an increase)
  2. If we refinance your existing loans to major bank, how much extra can we provide as a pre-approval? Note this will be more than in (1) above, since the extra amount will be deductible, and we can also include the rental income)
  3. Same as (2) above, but if we applied for the pre-approval with a more generous lender, to maximise the amount.

Just to show you how all banks are so different, here’s a bunch of things we at iChoice consider in the background. Like I say, you guys really don’t need to know this stuff, it will be our job to raise the things that relate to you;

1. Living at home with parents

Sarah lives at home with her folks and wants to buy an investment property. Even though she lives rent-free, the major banks calculator automatically assumes a notional monthly board expense of around $500 per month.

The maximum loan she can get at a Big 4 is around $450,000. But the calculator at Macquarie Bank doesn’t insist on us assuming this silly notional board expense. The maximum loan at Macquarie is therefore much better, allowing Sarah to borrow $540,000. Just like that.

2. Business Loan Commitments

Dr. John has a company that operates 3 dental surgeries. The fit out and medical equipment has all been financed with unsecured loans that have big monthly loan repayments, and a big car loan that’s also run through the business. Three of the 4 big banks make us brokers expense these as monthly commitments, which negatively affects his perceived capacity.

In this case, it meant I was unable to help Dr. John refinance his $4 million of lending and provide the extra $2 million he wanted for another investment at his favourite bank.

There are other banks however that don’t make us re-expense company debts, and rather work off the net profit (given expenses have been dealt with). Our solution was to refinance his $4 million to his favourite bank and then we went to the more flexible bank for the extra $2 million.

Happy days! Often the best lending solution includes more than one bank… and in the correct order.

3. Overtime

Much of the income earned by nurses and emergency personnel is overtime, and it’s shame that some banks don’t really like this. They want to see a pattern of consistency over time (sometimes over a year) and then ‘shade’ this income by 20%. Luckily, some banks now will add up the overtime over the last 3 months and simply multiply it by 4 to get an annual overtime amount. They don’t shade it and therefore can lend a higher amount.

4. Extending your home loan

Felicity has an $800,000 home loan with 23 years remaining and asked her bank for a pre-approval to buy an investment property for $1.5 million. Her bank did the calculation and said that based on her income she could only borrow a maximum of $900,000.

We refinanced her home loan to 1.89% but more importantly, extended the loan term to 30 years. Don’t get me wrong, Felicity has no intention of dragging her home loan out for 30 years! But because the contracted minimum monthly repayment is now much smaller, we can now extend around $1.6M for an investment purchase.

Given Felicity had $100,000 in her offset, we asked whether she really needed that, or whether it would be OK if we squashed her home loan limit down a bit to $700K, which she was fine with.

So we gave her a pre-approval for $1.75 million, subject to her home loan limit being reduced once she finds a place. When she does buy this investment property, she can either go Interest Only (so she can concentrate on squashing down her home loan) or going P&I to get a slightly better rate. If she does the latter, I’ll be by her side for the next 10 years suggesting she re-establishes a new 30-year term every now and then. It’s a tax thing. It’s what investors do every couple of years.

5. Reducing credit card limits

For every child you have, your borrowing capacity is reduced by around $80,000. For every credit card with a limit of $10,000 you have, your borrowing capacity is reduced by around the same! Anyway, you might know that your borrowing power is improved by reducing your credit card limits. What you might not know is that we can pre-approve a loan for you subject to the limit being reduced. So don’t feel like you need to reduce your limits prior to applying for a loan. Best to leave them high, if that’s what you want to do, just in case you don’t end up buying soon.

6. Buying a commercial property with no tax returns

You may have heard of low-doc loans, which is where the banks waive the need to carefully verify your income. I personally bought a commercial property in Woollahra for $515,000 a few months ago but hadn’t done my tax returns yet. By providing just my last BAS statement, I got approved within 3 days a loan for $412,000 (yes 80% LVR) at an interest rate of 2.7%. Low doc loans are cheaper than they used to be and apply to both residential and commercial purchases and refinances.

7. Inconsistent Business Trading

For self-employed loan applicants, the banks will generally want to see your tax returns for the last 2 years which can be disadvantageous if the previous year’s profit was not as good. I don’t agree this is fair. What a business did between July 2018 and June 2019 seems ancient history to me.

Some banks see it like me, just wanting to see one year’s tax returns. Right now, I’d need 2020 tax returns, or if it helps you, we could wait a few weeks and you can hassle your accountant to quickly do 2021 tax returns!

8. Refinancing business loans

I met a doctor with a $1M home loan who wants a pre-approval to buy an investment property. The thing is he has a $400,000 loan at Medfin that relates to his surgery, which is unsecured and therefore being serviced over 7 years. Because he has so much equity in his home, I recommended that this $400,000 loan be refinanced using his home as security. Because this loan will be now serviced over 30 years, his capacity to borrow more vastly improves.

There are 2 other benefits here, (1) the interest rate will be cheaper, and (2) it’s silly to pay down deductible debt so fast. He should just make the minimum repayments on this $400K loan and put all the extra cash into his home loan, which is serviced with his after-tax dollars and should be extinguished as fast as possible. It’s a tax thing.

9. Assuming actual rates on existing lending

There are some secrets in our industry. You probably know that banks assess your capacity on the assumption that interest rates are higher than they currently are, which we know as the ‘assessment rate’.

It is possible to have the lender assess all your existing lending at what the monthly repayments actually are, even if it’s interest only. You might be able to borrow only $300,000 at a major bank but get approved for $1.2M elsewhere!

Now I need to be careful here. Just because I’ve been around awhile and know my way through lending & wealth creation strategies, I still wear my Australian Credit Licence cap very firmly. The buck stops with me when it comes to adhering to responsible lending guidelines. Horses for courses.

Off-topic a little

I presented a recommendation to a solicitor last week showing that by refinancing his home loan, he’ll get a $3,000 rebate, unlock a little equity as a separate split, and the better interest rate that will save him $4,000 a year. His response was “why would I switch banks for only $80 per week”. What the?

I work in an industry where the banks are happy to pay us commissions rather than bringing on more staff themselves, which means my services are completely free for everyone. So is all the extra assistance and any advice I can provide my clients along the way.

I know spending an hour getting the documents I need to change banks isn’t all fun, but I think being too comfortable can be dangerous.

We can always move things around so you can still use your existing bank for everyday banking anyway, if that’s important to you.

Notwithstanding my little run for parliament a few years back on the left side of politics, it’s a simple fact that what I have come to specialise in, and what I really enjoy, is making rich people a little richer.

I wrote that in yesterday’s newspaper, far out let’ see how that goes down! I hope it’s taken within context.

I love helping first-timers too of course, who really need the right advice without all the fluff. Given the competitiveness in our field, the outside world seems to complicate things too much for them, trying to scare them into their welcome arms, far out.

Heaps of the youngsters I deal with are the adult children of my clients, which shows my age, I guess. Geez, I’m onto the next generation.

I love my job every day, helping people who want to help themselves. I guess that’s handy because they’re the only ones that get in touch.