It may be well known by our clients – but the average investor is not aware that they can potentially increase their long term borrowing capacity by over 100% by utilising a diversified lending structure. This is a common discussion I have with first time investors, which isn’t talked about in mainstream media and leaves many ‘direct to branch’ investors with portfolios which are limited by poor structuring from day 1.
It’s quite simple in understanding – but requiring finesse on the part of your broker to achieve. By carefully considering your long term investment plan, lender selection can be used to play lending policy against the various lenders, to maximise the borrowing potential far beyond what any one lender would allow. This isn’t just a case of just using multiple lenders, but using the right lenders at the exact right time. Through doing this you can grow you capacity by 1.9-2.5x what you would achieve with any one lender. Here’s how it works:
Scenario: Family with two children, existing home with mortgage
This scenario is stripped down to the basics – it will not comment on deposit releases, product types etc. This is purely a borrowing capacity experiment which will highlight the difference between using any one lender vs using a strategic mix of lenders to your benefit. The parameters:
- Couple, with one partner working fulltime at $75,000, other part time at $40,000 per annum.
- Two Children
- An existing mortgage for their residence of $400,000, principal and interest payments, 4.5% interest rate
- Credit Card of $6,000
- No other debts.
- Living expenses of $2,500 per month (as this is below the average lender estimate the lender will adopt their higher figure for a couple with two dependent children)
- Purchases are assumed at a 5% yield, 400k or less purchase price (400k is used unless the lender has insufficient borrowing capacity, in which case the lesser figure is used)
Here’s how that scenario plays out across a sample of some of the largest lenders in the market commonly used by investors:
As you will see, most of the lenders are within 5-10% of each other in terms of borrowing capacity – within exception to Lender B which is significantly lower than all other lenders. A lot of the general public do not realise this variance exists between lenders and their policy, which in turn affects investors ability to grow their portfolios.
By using a single lender, should the borrower pick the highest of lenders available by a stroke of luck – they could purchase a single $400,000 investment property, and still have a remaining borrowing capacity of $174,000 before their borrowing capacity is exhausted. (lender C)
As an alternative, through ordering the use of lenders – the same couple can use multiple lenders to extend their capacity far beyond any one lender’s capacity. Here is an example of the same couple, using strategic lending to grow their capacity further:
- Receives the primary residence’s loan of $400,000
- Purchase of investment property, $400,000 debt
- Purchase of investment property with debt at $325,000
- Purchase of investment property with debt at $450,000
Total investment lending: $1,175,000
Total Increase from ‘single lender’ scenario: 104.52% increase in capacity
This is a simplified example, when in reality a good investment focused broker will also weigh up interest only policy, cash out policy, cost effectiveness amongst other many other factors dependent on the individual borrowers scenario and needs – but the fundamental principle remains that through using the right lenders at the right stage of your portfolio growth, you can maximise your potential to borrow.
What Does This Mean For Me?
Through a strategic lending structure you can significantly increase your borrowing capacity than being reliant on any one specific lender. This involves careful long term planning – focusing on lenders which provide the best short, medium and long term outcomes, not RATE.
There are also ancillary benefits from structuring in this manner, including the non-centralisation of debt reducing your risk from any one lender restricting your ability to access equity or borrow further.
When investing, I would argue there are three main phases: Growth (buying properties), Consolidation (peak of investing, reviewing the portfolio and how to retire from there) and Retirement (peak realisation of investment, living off rent, selling properties etc).
Whilst growing the portfolio this diversified structure will allow investors to significantly increase their borrowing potential – whilst sometimes not at the most competitive rate. This justified during the growth period as the benefits of growing the portfolio.
When you do get to a peak size of your portfolio the ‘consolidation phase’ of your portfolio can commence, where by the entirety of the debt can be considered holistically as to whether there is any capacity to restructure debt for cost savings, increasing the portfolio cash flow position. This may allow debt reduction to accelerate or bring forward a position where you can retire from rent – in any case mitigating costs at this point is a prudent measure. It’s important to only do this once the likelihood of wanting to continue expanding your portfolio is unlikely, as a restructure of debts for cost saving may unravel the ability to continue investing through equity releases etc.
If you would like to have a discussion about your lending structure and the options available to you, click here to connect with us today