I n this eBook, we will reveal the lesser known loan strategies successful property investors are using right now to secure more funds, more investment opportunities, less interest rates and build a solid property portfolio. And what you need to do to be on the right track to long-term investment success. Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 2 Limit Credit Card Limits To Secure More Funds 1 If you are like most Australians, you probably have at least one credit card. Accordingly, to the Reserve Bank of Australia (RBA), there were over 16.5 million credit cards in circulation in Australia in June 2016. With Australia’s total credit limit now at a record high of almost $150.5 billion, this averages to a credit limit of $9,121 for each credit card! Credit cards are great for tiding us over a cash emergency or for earning reward points, but… Did you know your emergency line of credit could actually affect your ability to borrow and get in the way of getting your next investment property or that house with great development potential? You may say, “I don’t have any issues with my credit cards, I always pay off my credit card on time!” DID YOU KNOW Every $1,000 you have on a CREDIT CARD LIMIT will lower your home loan borrowing capacity by approximately $3,600! The key words are: CREDIT CARD LIMIT not the amount you owe! Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 3 Even though you might only owe $2,000 on a $25,000 limit credit card, lenders will still take the limit of $25,000 into account when assessing your loan. This is because your limit reflects how much you could go out and spend tomorrow. Whilst this doesn’t sound like much, if you have a $25,000 credit card limit then you’ve just lowered your borrowing capacity on your loan by over $95,000 – that’s a lot of borrowing power LOST! What does this mean for you? Well it means that you may not be able to afford that perfect rental property worth $750,000 with 3 bedrooms, 2 bathrooms and 2 garages. You may have to set your sights lower on properties worth around $650,000, which may mean either downsizing in the same suburb to 2 bedrooms, 1 bathroom and 1 garage, or looking further out from the city. This can not only hit the amount of rent you receive in the short term, but also affect your capital growth in the long run! Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 4 A REAL MORTGAGE CORP CLIENT STORY How eliminating credit cards allowed a client to buy their first investment property A Mortgage Corp client, an IT manager with a $100K+ salary who owns a $750,000 home, asked us recently to help him and his wife look for an investment loan. They were looking at buying their first investment property and it was all looking good until we asked – how many credit cards do you have? The answer? 3 credit cards for him and his wife with multiple cards ranging from $18,000, $21,000 and $22,000+ limits. We asked them WHY!? They simply shrugged their shoulders and said they didn’t use those cards anyway. The banks kept increasing their limits and they thought it would be good to have those extra credit cards around for emergencies…WELL THAT’S $220,000 LESS THEY COULD BORROW WITH $61,000 IN CREDIT CARD LIMITS! Thankfully, the broker was our senior mortgage strategist Neil Carstairs who advised them to cancel the cards they didn’t need, keep only one credit account with joint access and to lower the limit. The result? 2 cards sharing a $6,000 credit card limit Neil put together a strategic loan package and submitted it to a different bank - not the bank they had the credit card with. He structured it in a way to not only get the loan they wanted but also in a way that makes it possible for them to potentially purchase multiple investments in the future, which is part of their investment goals. Last month, our client finally bought their 1st investment! We also advised them that their next step was to get settled into the new set up and to manage their lifestyle more effectively using the new credit card arrangement and mortgage offset account to help reduce the home loan interest more effectively. Once they get settled in they’ll be off looking for their next investment in no time! Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 5 DID YOU KNOW For some loan products, lenders automatically add a $6,000 credit card to your application even if you didn’t ask for it! This adds unnecessary credit limits that will affect your future borrowing capacity. This shows how crucial it is to know how to properly structure your loan application and not just your loan. For example, if you have a credit card and you owe money that you can’t pay off during the application process, it may be a good idea to do a ‘balance transfer’ so you can transfer the amount owing to the bank you’re applying to for the loan. You will save more money on fees when you bundle your existing credit card with your mortgage. Some lenders will also assess your loan application more favourably if you switch over your credit card balance. Got a question? Click here to send an enquiry! Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 6 2 Realistically Assess Your Borrowing Power And Serviceability Property investors often think that their rental income increases their borrowing power dramatically. In short “yes it does”, but often by not as much as they think. Not all your rental income can be used for serviceability! DID YOU KNOW Most banks will only factor in 80% or less of your rental income when assessing your loan application? This means that if you’re earning rent of $400 per week, your lender only sees $320 or less per week on your application. Even if YOUR OWN figures show that rent should cover interest and you were counting on your rental income to get your loan application over the line, sorry to say, but you might be disappointed to find out how much the bank will actually use! This isn’t all bad news as it means that even in a worst case scenario you would still be able to maintain the mortgage repayments. The upside is that in a rate rise you will have peace of mind knowing that you have a buffer so you won’t fall behind on payments. Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 7 A REAL MORTGAGE CORP CLIENT STORY How understanding how lenders factor in rental income helped a client secure a great investment opportunity and structure his borrowing more effectively We recently had a new client approach us who is highly-educated, has a high-ranking position in a publicly listed company and who owns a $1 million home. He seemed to know a lot about property investment and knew what he wanted. He came to us after he wasn’t able to find a bank who could lend him the amount he needed to purchase a house with fantastic development potential. He was tired of his previous broker who only knew how to find the lowest interest rate without understanding his investment plans. Long story short, neither the client and nor his previous broker understood that lenders were only using 80% of his rental income when working out his borrowing capacity. His loan structure was also not set up correctly to be tax effective and to provide adequate loan flexibility. Now that he understood this, he realised he needed other ways to boost his borrowing capacity. It turned out that he was planning to use cash and savings as a deposit and was only proposing to borrow 80% against the investment (to avoid paying Lenders’ Mortgage Insurance). However, as he only had a small mortgage remaining on his own home, STRAIGHT AWAY Neil saw an opportunity to assist this client get 100% borrowing on the proposed investment (still without needing to pay Lenders’ Mortgage Insurance) and to get a more effective loan structure. Neil also suggested the client speak to his accountant to possibly get more out of his loan from a tax perspective as well. Result: We increased the client’s borrowing capacity dramatically and he was able to secure a great investment and his loans is now structured more tax effectively This leads us to the next strategy related to negative gearing. Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 8 3 The Lesser-Known Benefit Of Negative Gearing The most recent Australian Taxation Office (ATO) figures show that property investors in Australia claim $11 billion in negative gearing deductions per year. The number one reason negative gearing gets talked about is because of tax benefits. Another little-known benefit of negative gearing is it can also increase borrowing power and make loans cheaper! Some lenders, but not all, will increase the amount you can borrow by factoring in the tax savings you make from negative gearing. Let’s say you earn $80,000 a year and make a rental property loss of $10,000, because your interest and expenses exceed your rental return. This means you have an additional $3,250 of tax benefits per year which you can either use to service your mortgage repayments or pay off your OWN mortgage faster. Negative gearing has helped some of our clients achieve $20,000 extra borrowings to $100,000 in We are not solicitors or registered tax agents and we cannot give you tax advice, but as mortgage brokers we know that some lenders use negative gearing to assist client get access to more funds when purchasing or refinancing investments. Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 9 A REAL MORTGAGE CORP CLIENT STORY How a client used negative gearing to increase his borrowing capacity by $100,000 We had a client who was looking to purchase multiple investments. He had been to a couple of lenders but couldn’t get the amount he wanted for his loan. He came to our loan strategy session where we sat down with him and found out that his borrowings were over 90% of the value of the proposed properties and the maximum loan he was offered by one lender was around $850,000. He had plenty of equity in his owner-occupied and other investment properties and he had loans with multiple banks. We recommended that he restructure his investment lending and consolidate his loans. We also helped set up his new loan structure and found a new lender who agreed to lend him nearly $950,000 - that’s an extra $100,000 for investment lending! The reason we were able to achieve this result is because his other lenders didn’t take negative gearing into account when assessing his maximum loan amount. It’s also important to understand that borrowing money from multiple lenders will in most cases reduce your borrowing amount with a new lender because they will add a repayment buffer to your current loans with other lenders. We don’t recommend our clients buy properties for negative gearing’s sake - negative gearing is often just a small benefit of owning and investment property. Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 10 Don’t just borrow more – borrow cost effectively Some banks also take into account negative gearing when it comes to determining your loan to value ratio (LVR) – this could mean you can potentially save thousands by: ÂÂ Avoiding lenders mortgage insurance (LMI); and/or ÂÂ Being able to achieve a better interest rate on your loan. It is therefore essential to know what each lender’s policies are, so that your negative gearing is factored in a way which achieves the outcome you want. Got a question? Click here to send an enquiry! Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 11 Increase Your House Value The Smart Way 4 Bank Valuation vs. Real Estate Appraisal Have you ever been in a situation where the real estate agent is quoting $600,000 but the bank is somehow coming up with a lower valuation of $550,000? It can be frustrating when a lower bank valuation means the difference between getting your loan approved and rejected. As the bank valuation is one of the main things a lender uses to work out how much to lend to you, it’s important to understand what they look for (and that if they sold your house next Monday, how much could they get!!!) What does a valuer look for? A bank valuation is carried out by a licensed valuer – rather than a real estate agent. The valuer looks at factors such as: ÂÂ comparable sales in the area within the last 90 days ÂÂ the number and types of rooms ÂÂ fixtures, fittings and any improvements ÂÂ the standard of presentation such as flooring, tiling, painting and landscaping ÂÂ location and environmental factors such as whether the house is on a main road, zoning and vehicle access Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 12 Should you clean up your house to impress the valuer? When we tell a client a valuer will be visiting their home to get a valuation, their first reaction is often “well, I better get the house cleaned up!” We say “don’t bother – you’ve got better things to do!” The valuer doesn’t care if your house is clean, whether you’ve got dishes in the sink or clothes on the floor – they’re only interested in your fixtures, fittings, tiles, painting, backyard, roofs, walls, fences and all the things that make your house saleable if you were to vacate the property and put the house on the market that day. Unless you have some unfinished painting or holes in the wall for the new TV, we wouldn’t suggest you do too much at all. How to increase your property value? You can increase your home’s bank valuation through the following ways: ÂÂ for those on a small budget - try a cosmetic renovation as this doesn’t cost you as much but can increase your house’s value. This can include repainting, flooring/recarpeting, landscaping, installing better lighting and tiling. Even adding or upgrading appliances like stoves, range hoods and dishwashers can do the trick. ÂÂ for those on a bigger budget - for longer term returns try redoing the kitchen and bathroom or adding an extension such as an extra room or an extra bathroom. These will usually have a better return on investment with new equity. Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 13 5 Say Goodbye To Advertised Interest Rates Banks might advertise one interest rate on their website but a good mortgage broker is often able to get you a more suitable rate or reduced fees simply by the way they structure your loan application. For example, in 2015, banks started to set higher interest rates for investment home loans compared to owner-occupied home loans in response to changes by Australian Prudential Regulation Authority (APRA). But experienced brokers have been able to achieve owner-occupied interest rates for property investors. This is not available through all lenders and industry knowledge is crucial. That being said, we often warn investors not to simply chase the lowest interest rate because it can often end up costing them more. Take the case of a fixed interest rate or introductory rate that might look lower at first but if you suddenly need to sell within the fixed term, or the introductory rate expires, you’ll either be back where you started or up for early repayment penalties that outweigh any interest you save. It pays to consider other conditions of your loan before diving into a loan with the lowest advertised rate. One Bonus Tip! If you have a salary sacrifice arrangement with your employer – for example, a car loan or a novated car lease – WATCH OUT – this can actually hinder your borrowing power. This is because a lender assesses your borrowing power based on your normal gross income and tax instalments. Saving tax and cash through salary sacrificing DOES NOT help you borrow more money. Your Next Step to getting the right loan and loan structure for long term investment success Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 14 REQUEST FREE LOAN STRATEGY SESSION with senior mortgage strategist Neil Carstairs There’s no doubt that analysing the many factors that go into an investment loan can be confusing and time consuming. At Mortgage Corp, we take the time to understand your goals and unique situation and then come up with a mortgage strategy on structuring your loans for long-term investment success. Unlike many mortgage brokers that may be able to help you with general loans but simply don’t have the skills, experience or resources to genuinely help property investors maximise long-term return, Mortgage Corp take a strategic approach to help our clients maximise their overall investment result. Mortgage Corp receives consistent 5 star customer reviews, read the reviews here and find out why. REQUEST FREE LOAN STRATEGY SESSION Mortgage Corp | www.mortgagecorp.com.au | Phone 1300 138 943 15