Question – “I’ve hit a serviceability wall, and the bank won’t lend me the amount I need. How can I maintain or increase my borrowing capacity, so I can buy the property I want?”

This is a common question we get asked by investors and first home buyers alike, especially with changing interest rates, bank polices changes and the APRA banking rules that were introduced in 2018.

If you speak to your everyday broker or banker, their answer might be – increase your income and pay down your debt.

This is true, but it’s often easier said than done!

The Shape Home Loans answer would be that it comes down to how we structure the loan and the lender we use.

Leveraging our experience and expertise

Increasing or maintaining your servicing comes down to how you plan, structure your loan and the lenders you choose. There are more than 18 different loan structures combination available, example interest only set up, trust, company set up, fixed rate, split loan, equity loan etc..

Each structure will produce a different result and is suited to different circumstances and goals.

Each lender have a different formula and credit policy to calculate your maximum borrowing capacity; Shape Home loans has access to over 45 lenders.

Some basic ways to increase your serviceability

  • Cancel or reduce unnecessary credit cards limits ( example a $10,000 credit card limit could reduce your max loan by $50,000)
  • Cancel or reduce unnecessary store cards limits and Zip pay.
  • Pay down non- tax-deductible debt first such as Personal loans, credit card and car loans
  • Review your investment property rental income
  • Consider a PAYG variation on your tax return (for some property investors)
  • Make sure your tax returns are up to date (you may need to rely on other form of income such as Share, dividends, trust distribution and bonds etc..)
  • Review your current home loan interest rate on your loan compared to the market, if it’s 0.20% higher for a comparable and similar product then give Shape Home loans a call.

Leveraging loan structure and choice of lender

Here are 10 ways loan structure and choice of lender can make a difference to serviceability.

Interest only loan – Setting up your current loan as interest only will reduce your monthly liability and allows you to pay down non- tax deductible loan first; Using this method to increase your borrowing capacity only works with some lenders – speak to your broker first.

Using fixed interest rate at the right time – Using a fixed rate for the right type of loan and property at the right time is critical in increasing your serviceability. Some banks will increase your serviceability if you fix your loan for three to five years, depending on the bank and loan type. Fixing the loan to early in your investing cycle or for the wrong reasons is a common mistake investors make.

Buying an investment property under a trust or company set up – This is a more complex method of increasing borrowing power, but it has it’s place and work for some more advanced investors, generally those looking at buying three or more properties.

Choosing the lender based on their income policy – Each lender has a different policy regarding the amount and type of income they accept. For example, the Bank of Queensland will ask for two years of tax returns and may average, while other lenders may only ask for one year.

Lenders accepting bonuses, allowances, overtime and casual income – Banks can be very traditional in their thinking, and as a result, some banks will only accept base wages and discount the income from non-standard sources such as bonuses, overtime and allowances. However, we do have access to lenders who will consider 100% without any discounts on non-standard income.

Different “servicing rate or assessment rate” formulas – Banks generally have a 3% buffer in place when they assess how much you can borrow. But this is not always the case with smaller lenders, where the buffer may range from 0% to 2%. Choosing the correct lender can boost your borrowing capacity.

Refinancing – Refinancing for a lower rate or increased loan term (25 to 30 years) can increase your borrowing power.

Choosing the correct lenders in order of servicing – Some lender has a different servicing model which you have three or more properties, so choosing the correct lender at the right time is important.

Understanding add backs – This is more common among self-employed borrowers whose taxable income might be a lot lower than their real income. This can be due your accountant claiming some non-cash lost deductions. In these cases, we can get the banks to add these back into the income calculations. Common add backs include instant asset write offs, depreciations, one-off expenses, superannuation, interest expenses.

How your file is presented – It sounds simple, but sometimes it comes down to how your file is presented to the lender when it comes to risk and mitigations.

Other important considerations

We might be able to maximise your borrowing power, but you do need to ensure you don’t over-commit, and can afford the loan now and into the future.

  • Have financial buffers in place
  • Consider personal insurance such as income insurance and life insurance to financially protect your family.
  • Consider your current and future financial capacity.
  • Plan for an increase in interest rates
  • Assess your financial situation on a regular basis, as circumstances do change.
  • Plan ahead to meet your commitments and goals.
  • Ask for help when you need it