How often have you typed some numbers into those online loan serviceability calculators, only to be pleasantly surprised when the bank’s estimate of how much you could afford to borrow exceeded your expectations?
Perhaps you’d already run through some figures on your own in order to determine your monthly repayment capacity, and felt deflated at the prospect of not being able to obtain a big enough loan for that dream home or investment opportunity you’d been eying.
The fact is, what lenders suggest you can borrow; their idea of serviceability – is based on general algorithms applied to every single applicant in exactly the same context.
Sure they work on your specific incomings and outgoings, but when it comes to how much might be shaved off your ‘capacity to repay’ ranking because of things like ‘number of dependents’ for instance, it’s all fairly standard.
There’s no real accounting for your personal circumstances, long-term property ownership goals and the general direction you plan to take your life in, when they accept you as a ‘valued client’.
Here at Trilogy, we’ve had clients receive approval for loans that are up to 50 per cent more than they should ideally borrow, in order to maintain an optimal debt exposure level and prevent their growing portfolio from spiraling into a financial black hole.
As such, when it comes to structuring a loan that’s not only manageable, but also flexible enough to suit your long term serviceability needs and circumstances, the onus falls squarely on the borrower’s shoulders.
Here are five questions you should answer to mitigate the risk of over-committing to an unsustainable mortgage, either as a homeowner or property investor.
1. How much surplus cashflow do you have?
The first step in determining your serviceability level is to create a basic balance sheet; listing all of your everyday expenses and total income to determine how much surplus cashflow you have available to fund a property loan.
From there, it’s about future financial modelling to consider what might happen to your repayments when interest rates aren’t perhaps as favourable as they are right now.
Remember to base assumptions on any potential lifestyle changes that could impact your earning capacity or significantly add to your outgoings, such as one partner ceasing paid employment for a period of time to start a family.
2. How much risk are you prepared to take on?
If obtaining a higher loan amount means a whole lot of stress and sleepless nights, why would you bother?
Assess the level of risk you’re comfortable with, because any type of gearing will not only augment the rewards you can realise through residential real estate, but the associated risks too.
3. Will you have enough flexibility?
This is a critical question for property investors because although it’s not a widely publicized fact, lenders have their own, in-house thresholds or credit caps that they apply to individual borrowers.
If you creep too close to this magical figure (usually around $1 million), you might find that the next loan you apply for is rejected outright with seemingly little explanation.
This means you could be left high and dry when attempting to leverage into further high growth property investments and build on your portfolio, even if you have a solid asset base that supports further funding on paper.
In this instance, maintaining an optimal serviceability level will depend on how your loans are structured across various lenders and loan products.
4. What are your long-term objectives?
If you plan on leveraging into further housing investments to build a substantial portfolio as the foundation of your retirement income, loan structuring is crucial to ensure you receive an optimal rate of return and have the ability to add to your asset base as required.
Should you find yourself caught up in a messy, cross-collateralised loan with one bank claiming all or the majority of your assets as security, your serviceability will slowly deteriorate, before finally dying a natural death.
Work out what you hope to achieve and from there, consider how to best structure your debt portfolio in order to retain better control of your serviceability levels into the future.
5. What if I over-reach?
As mentioned above, one of the biggest concerns for investors is the potential to effectively be ‘cut off’ from any further credit by your lender. This is obviously a scenario you should work to avoid at all costs.
For borrowers in general, the bottom line always has to be whether you can actually afford the debt you intend taking on.
Remember, you know far more about your financial and living situation…and care about it a lot more too…than all the faceless lenders out there.
A great way to account for your specific circumstances when it comes to assessing borrowing capacity and serviceability is to befriend an appropriately qualified and experienced mortgage broker.
Property investors in particular will benefit from a relationship with an independent broker who understands the financial intricacies of building a wealth-producing portfolio, and can help with the correct loan structuring from the very beginning.