Serviceability is one of the major factors banks consider when approving an investment property loan. It is the lender’s way of assessing whether a borrower can meet loan repayments and is therefore a key step in mitigating the risk take. In this loan assessment, lenders will review existing assets, income and financial situation (including outstanding debts).
Changes to the Australian Prudential Regulation Authority (APRA) rules and the Banking Royal Commission leading to increased scrutiny in the lending sector have seen many banks review and adapt their serviceability metrics. As lenders move to adhere to new lending guidelines, investors will need to be more prepared than ever when it comes to applying for loan approval.
If you’re planning to apply for an investment loan, here are a few tips on how to improve your serviceability and maximise your potential borrowing power.
1. Cut back on credit card limits
As part of their serviceability assessment, banks will assess your outgoing expenses and outstanding debt repayments to determine your ability to pay back your investment loan.
Banks consider your credit card limit as debt. For instance, if you have two credit cards with a limit of $15,000 each, the bank will regard this as $30,000 debt. They will calculate a percentage of this as ongoing expenditure and take a monthly liability to mitigate their risk. If you have credit cards that you rarely use, consider reducing your credit card limit or cancelling unused cards to improve your borrowing power.
2. Pay down debt and reduce overheads
Outstanding debt can have a significant impact on serviceability for an investment loan, limiting perceived capacity to meet mortgage repayments. If you are looking to purchase an investment property and have existing debt, it’s always a good idea to pay this down where possible.
If you can, you should also consider reducing your overheads and avoid taking on any unnecessary expenses. Expensive phone plans and big car leases may be a luxury, but they can also significantly reduce your net income, and could end up weighing heavily against your serviceability.
3. Keep a record of income
If you are approaching a lender for loan approval, make sure you keep an updated record of recent information regarding your income. If you’re self-employed especially, this record will help you prove your actual pay.
Whilst all banks assess loan eligibility differently, some lenders may consider additional income such as bonuses favourably when it comes to assessing your financial capacity, so it’s important to disclose this information.
4. Shop around for lending products
Eligibility for loan products can vary considerably between different banks. Just because one bank deems you ineligible to service a loan doesn’t necessarily mean this will be the case for all. For instance, lenders will often have different requirements when it comes to employment contracts, with some requiring borrowers to work in a position for six months before they regard their income source as stable.
Whilst you should avoid submitting loan application after loan application due to the negative impact on your credit score, researching the market can significantly increase your options and perhaps find a better loan product.
A good mortgage broker will be able to assist you in identifying the best lending solution and loan features to suit your situation and may also be able to carry out a pre-approval to assess the likelihood of you qualifying for a loan.
5. Save more equity
Although it may take time, building up more equity before borrowing from the bank is one of the most effective ways to reduce your loan-to-value ratio and decrease your loan obligations.
Whilst many banks are willing to lend up to 90% of a property’s value for investment purchases, a loan-to-value ratio of 80% could save you the additional cost of Lender’s Mortgage Insurance and reduce the amount required for mortgage repayments.
This can be especially important if you are considered a high-risk borrower, as lenders may require a larger deposit to mitigate their risk in lending to you.
6. Seek professional help
With the volatility of the lending environment, many investors are realising the value of working with a specialised mortgage broker when securing a property investment loan. A good mortgage broker will have an in-depth understanding of different lending solutions and can help identify the best product to complement your individual situation and long-term property investment goals.
Megan Caswell is the media co-ordinator at Australian property investment consultancy, Momentum Wealth. The information provided in this article in general in nature and does not take into account your personal objectives, financial situation or needs.