Recent changes by the Australian Prudential Regulation Authority (APRA) have led to a significant tightening of investment lending criteria by the major lenders.
Fortunately, there are still numerous ways for investors to discover a loan that's right for their circumstances.
Don't be disheartened
First things first, don't let the tightened lending criteria deter you from entering the market or advancing your property portfolio. This isn't the first time Australia has seen stricter lending policies, nor will it be the last. It is a savvy investor and their mortgage broker's job to navigate these changes and adapt to the ever-changing market.
One of the key ways to improve your investment borrowing power is to minimise any debt. Any debt you are carrying impacts your ability to service an investment loan. Credit cards, in particular, can affect your bottom line. When calculating your ability to repay a loan, many lenders will assume your credit cards are maxed out. So if for example, you have two cards each with a $10,000 limit, they will count as a $20,000 debt on your application, regardless of your actual balance.
Get rid of any cards you don't use and reduce your existing credit limit if it is higher than you practically need.
Take a good hard look at your expenditure and consider getting rid of any 'nice to haves' that you really don't need. Lenders will ask for a breakdown of your living expenses and while necessities such as food, transport, insurance and utilities are non-negotiables, you may be willing to sacrifice some luxuries such as holidays, gym memberships and pay TV subscriptions.
Minimise your Loan to Value ratio
The Loan to Value ratio (LVR) examined by the lender is simply the amount borrowed in relation to the property's value, usually expressed as a percentage. Tighter restrictions on investment borrowing has seen the generally accepted loan amount drop from around 90-95 percent of the property's value too in some cases as low as 80 percent.
The simplest way to minimise your LVR is to save a larger deposit. If your parents or other family members are financially secure you may also consider asking them to go guarantor on your loan. But there are significant risks for the guarantor and you should beware the family friction this may cause if things don't go according to plan. If you have an existing property, ensure you are paying down principal to build up equity.
Pay ALL your bills on time
Ensuring all your bills are paid on time not only helps your credit rating, it is good practice and gives lenders a solid picture of your spending and saving habits. Why not use a financial app to get you started. Mint – one of the most popular personal finance apps – gives you a complete overview of your finances, from bank accounts and credit cards to loans. It tracks and categorises your spending and alerts you when you approach your budget limit. Others you may like to try include Money View, Qapital and Level.
Talk to your broker about investment planning
Your broker is privy to a wide range of financial information, together with access to hundreds of products and funding arrangements that might suit your current circumstances. Opportunities with lenders are again surfacing following the slowdown in investor lending last year with lender appetites and policies continuing to change on a regular basis. Your broker is best placed to steer you through these changes given their extensive networks across the wide lending panel they have access to. Don't forget it is important to get it right the first time, as applying unsuccessfully for loans can leave a mark on your credit history.
Maximise your earnings and keep your records up to date
Again, this is one where your broker is best placed to have all the information as lenders vary in how they classify income streams, such as dividends, child maintenance, bonuses, commissions, government benefits and rental incomes, which can all go towards boosting your earnings. Remember to always keep your book-keeping and tax up to date so the lender has a clear picture of your financials.
- Reduce credit card limits.
- If you have any overtime or bonus income or a car allowance, consider a lender that will include these forms of income when assessing your application.
- Save for a larger deposit. The higher your deposit, the higher your borrowing capacity.
- Engage a broker that understands the different policies that lenders offer and the key ways to maximise borrowing capacity.
For more information about investment lending criteria, contact Advanced Wealth today. We are always here to help.