“How can I increase my serviceability?”
…..is a question I get asked all the time.
Once you understand the power of property as a vehicle to creating long term wealth you will want to buy one investment property, then buy another and then another. It can literally become quite addictive
Trouble is, while holding properties long term will create wealth from capital growth, having cash flow to support your portfolio is like needing to have a pulse to keep your body alive.
After you’ve bought your first or second property, you can often get stuck because your serviceability won’t let you buy more properties.
If you want to improve your cash flow, look carefully through the following strategies. Growing your portfolio further may be possible by applying one or more of these ideas.
1. Reduce your credit card
Your existing credit limits have a large bearing on your ability to service new loans. Having a high credit card limit can dramatically reduce your serviceability.
Many borrowers get easily confused about how a lender will treat their credit card debt (or lack of it). Most people believe it’s your credit card balance that counts but that is not the case.
Lenders will take the limit on the card as a possible debt level regardless of whether or not you pay your credit card off on a monthly basis. So even if you have a zero balance on your $10,000 limit credit card most banks will count that $10,000 as a liability.
Lenders will also assume you have a monthly debt repayment of 2%-3% of your total limit.
To give an example, if your credit card limit is say $10,000, most lenders will assume your minimum monthly debt repayment to be $200-$300. This calculation stays the same from the lenders point of view, regardless of how much you have outstanding on your credit card at the time of your loan application.
At the time of making a new loan application or accessing your serviceability, you should try to keep your credit card limit as low as possible. The key things to consider when taking out a new loan is to keep your credit card limits as low as possible.
Even inactive or unused credit cards are considered in the same way as the example above. If you own multiple credit cards do your best to cut up or cancel as many of them as you can. This will be advantageous even if it is for the short period of time that your loan application is being submitted for approval. If you have to keep one card available during the loan application period, at least request that the credit limit be reduced to as low as you can manage for that period of time.
Don’t apply for any further credit facilities such as credit cards, car loans or personal loans while you are having an increase to your serviceability accessed. All of these limits will reduce your ability to borrow.
2. Consolidate Your Debts
Consider combining any unsecured debts such as other personal loans you may have into your existing mortgage repayments. If each of these unsecured debts are listed individually you will see a high monthly total that needs to be paid out in order to reduce these short term debts.
A lender will look at these high monthly repayments and calculate this against your serviceability. They will consider each of these repayments to be less money you have available to meet a new mortgage repayment.
By rolling the debts into your existing mortgage, the repayment will be seen as one lump sum and this will immediately work in your favour to help increase your serviceability.
3. Know Your Numbers And Keep Them Up To Date
I know how much I spend on every thing that goes on in my life (including how much all my coffees cost me!). While this may been an overkill to some – I believe it gives me massive power.
I can see areas that I can cut back on if necessary. I can notice if a change if unusual charges occur in relation to personal or property invoices. And I believe in focussing on abundance.
You might not have the same reasons as me to know your numbers but when it comes time to increase your serviceability you will be able to:
• Provide the most up to date information possible on your income levels to your lender.
• Complete your tax returns on time (money back in your bank account quicker).
• Provide information on your entire income. If you are working for wages your last two payslips may not accurately reflect your annual income. And if you are self employed or relying on income from your property portfolio like me, you will need to be able to see your annual income.
4. Join With Your Partner
If you have previously loaned money in just your name you can increase your serviceability by joining with your partner this time around. Including your partners income in the loan application will boost your serviceability. Understand of course that your partner will also then also become responsible for the debt if a new loan is approved.
5. Split Liabilities With Your Partner
In the exact opposite to the above strategy – you can split the liabilities for some of your expenses with your partner. You will need to be buying a property only in your name for this to work.
Provide proof in your application that your partner is responsible for certain obligations and you may be able to increase your serviceability.
For example, you could show that your partner supports – and will continue to support – your dependent children and the lender may disregard any financial costs associated with their care.
6. Get The Right Product For You
There are so many loans on the market now it’s like a smorgasbord. And each new product comes with its very own features. Every lender has their own criteria and guidelines when it comes to approving loan applications. This is where a broker can be of such a help to you. They know and understand each of the lenders requirements and can match you more easily with a lender whose guidelines you meet.
Many features of products that can mean you either are or are not able to service a loan include:
- Fixed interest
- Variable interest
- Type of loan eg: line of credit
Not every bank will access your income in the same way. Some lenders will require you to have been employed in the same job for a longer period of time than another lender. Some lenders include certain types of income such as government benefits whereas other lenders may exclude them.
If you want to seek every possible opportunity to increase your serviceability, work with a reputable broker who can really shop around to find the right product for you.
7. Keep On Top Of Your Existing Interest Rates
If you can get a lower interest rate for any existing loans this is going to mean lower repayments. Lower repayments will help increase your serviceability!
While the RBA interest rate has remained steady for a long time now, we have personally telephoned our bank three times in the last twelve months to request a reduction in our loan interest rate. Every time it has been granted! You must stay active in pursuing every avenue open to you to maximize your profits from your property portfolio. Keeping on top of your existing interest rates is a way to easily keep more cash in your bank account.
8. Pay Interest Only
Not everyone is aware that lenders will nearly always allow you to make interest only repayments on your loans. The first loan many people have is for their principal place of residence (PPR).
While you can pay principal and interest to help reduce the overall debt, it is also common to request your mortgage repayments be interest only; even if it is your PPR. This will mean your monthly repayments are considerably lower than if you were paying principal and interest. Lower repayments equals great serviceability next time round.
9. Stretch Your Loan Term Out
Most mortgages have a loan term of 25-30 years. Some lenders will agree to letting you extend this out to 40 years. This 10 year difference can make your repayments hundreds of dollars less each month. If you need to increase your serviceability you might want to have a serious conversation with your existing lender about this option.
Extending a loan like this will mean your overall interest paid is more but it could be well worth it if it means you’ve been able to access additional funds to propel you further into the property market.
Being able to secure and hold an additional property that has good capital growth potential might far outweigh the additional interest you pay on the extended loan.
10. Save…And Then Save Some More!!!!
If you’ve set a goal for what you want to achieve, it will be easy to be determined with this strategy. It is also easy to implement and requires the very least effort of all.
Establish a budget and keep track of your spending. Allocate a certain amount of your income regularly to a savings account.
Aim to save 10-25% of your deposit. The amount you will need will vary depending on which product your mortgage broker considers best for you. If you’re using equity from an existing property, it’s still a good idea to save up a nice stack of cash before applying for your loan.
Careful planning, debt reduction and consultation with your broker and key factors to increase your serviceability without having to make dramatic changes to your existing lifestyle.
Start working on these strategies today and speak to a reputable broker to help you calculate how much you can borrow for your next property