How understanding servicing calculators can double your borrowing capacity

How understanding servicing calculators can double your borrowing capacity
How understanding servicing calculators can double your borrowing capacity

Ever wondered how borrowers on average incomes manage to borrow millions of dollars? If lenders apply buffers to mortgage debt, how can investors continue to borrow?

This can be done by carefully structuring your loans and using different lenders over time to maximise your borrowing capacity. Understanding how different lenders calculate borrowing capacity can help you go from one property to many! Whether you are on your first investment or your tenth, lenders will use their serviceability calculators, calculate your income and expenses, and will lend to you based on what ‘surplus’ is available. Property investors can take advantage of differences in the way each lender calculates this ‘surplus’ to build larger property investment portfolios. 

The principle is that investors can grow a larger portfolio by using a pool of lenders, rather than by having all their loans with one individual lender (and assessed on one servicing calculator). In fact, property investors can borrow a ‘multiple’ of their borrowing power with an individual lender.  At Confidence Finance, we call this the ‘finance multiplier’.

In today’s lending environment, this finance multiplier can be close to 100%.  That is, by correctly structuring your finances and choosing the right lender at the right time, it is possible to almost double what you could have otherwise. The key to this is to understand the typical characteristics of property investors and how this feeds through to individual lender serviceability calculators.

Firstly, rental income forms a larger proportion of their income. As you accumulate a larger portfolio, your rental income grows not only in an absolute sense, but also as a proportion of your household income.

Secondly, investment debt expenses are higher than most other borrowers. As a portfolio grows over time, so too does investment debt. This will often be a property investor's largest ‘expense’ in their serviceability calculation.

Now, this is where the knowledge of different servicing calculators can really benefit you. Rental income is treated quite uniformly between different lenders, generally taken at 80% of your actual rental income. On the other hand, investment debt expenses are treated very differently by different lender calculators. This means that as property investors grow their portfolios, there is a greater divergence between what individual lenders will allow you to borrow, as they are placing different buffers on your existing repayments. These buffers mean that the ‘assessed’ expenses in serviceability calculators continue to rise with each individual investment purchase more than the rental income that is created.  The net effect is lenders will lend less and less to you as you grow your investment portfolio.  

So how do property investors diversify their lenders to borrow more? For property investors seeking to maximise their borrowing capacity, it makes sense to begin your investing journey with a lender that gives you maximum flexibility to revalue and release equity. These are often, but not always, the larger banks in the market.

Once your borrowing capacity is ‘soaked up’ with these lenders and they are no longer willing to lend more to you, property investors can swap to an aggressive lender and continue to grow their portfolio. These aggressive lenders tend to be smaller lenders whose servicing calculators apply smaller buffers to existing debt obligations. That means assessed expenses are lower with these calculators and therefore they have a higher net surplus to leverage. This results in greater borrowing capacity, often double than what you would be looking at if you only tested your servicing with the big banks.

Keep this in mind if you are with a major bank and being told no. There are finance options and strategies that savvy investors can use to keep growing a portfolio.

Curtis Stewart

Curtis Stewart

Curtis is a director at Confidence Finance, a mortgaging broking firm specialising in working with investors to grow investment property portfolios. Curtis is also an active investor himself, bringing his personal understanding of investing strategies and property to his role as an advisor for clients.

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