A journey of a thousand miles begins with a single step. - Lao Tzu
The recent APRA-led lending changes occurred in 2015 targeted borrower’s ability to repay debts, with a focus on interest rate buffer, interest only loans and living expenses. The result meant an overall reduction to an individual’s borrowing capacity.
Nevertheless, you can still achieve multi-million dollar portfolios even on average incomes, provided you are disciplined with your investments and spending habits. Even in today's environment, clients are often shocked and surprised at how far their existing finances can take them.
There are many factors at play, but I've picked out the 4 most important ones below:
1. Trying to build a portfolio by going directly to a bank
One of the common misconceptions is going direct to your local bank and thinking the game is over once they say no to lending you more money. In fact, your investment journey could well have just started! Why? Because each lender assess your financials differently, just because one lender says no doesn’t mean others will also. This is where a mortgage broker that specialises in investor lending can really make the difference, they understand the niche of each lender and can structure your finances to achieve your investment goals.
Furthermore your average bank lender is trained to offer you the mortgage product that is the most profitable to the bank's bottom line, on top of that trying to cross sell you every other bank product that you may or may not need. With a broker we focus on the things that matter to a property investor: the right structure, the best valuation, the best policy etc.
2. Order of lenders
Because every bank calculators your borrowing capacity differently, in order to maximise your borrowing you want to start with foundation lenders that are most conservative, and work your way to lenders that are investor friendly.
For example, Foundation lenders like Westpac and ANZ put a high buffer on loans from other financial institutions, while investor friendly lenders like Liberty and NAB do not. Using them in the wrong order could mean that you hit your borrowing capacity a lot earlier than otherwise.
3. Adopt a cash flow focused strategy
In properties capital growth is what ultimately builds you wealth. Cash flow however is what keeps your property portfolio afloat. It is no good having a high capital growth portfolio, but do not have the cash flow to sustain it. A good portfolio should have a well diversified portfolio which has plenty of capital growth potential, as well as cash flow buffers which allows you to ride out the storm even during periods of interest rate increases.
4. Protecting your borrowing capacity
Become educated about what impacts your borrowing ability early will allow you to 'maximise' your borrowing power and continue your investment journey. Minimise applying for unnecessary credits such as credit cards or personal loans which can cause banks to turn you away.
Disciplined budgeting also helps to protect your borrowing power. Lenders sets a minimum benchmark based on your income and geographic location, any discretionary spending above the benchmark will reduce your borrowing capacity.
By following the above advice in a disciplined manner- you too could build a very large property portfolio on an average income.