Building a large portfolio through structured lending

Building a large portfolio through structured lending

Financing a large portfolio has always had its complications, but with the recent APRA interventions against lending to investors the difficulties have increased further. It isn’t impossible however, investors can still very much build significant investment portfolios with careful planning.

Understanding How Lenders Look at Borrowers

To understand how you can maximise your borrowing potential, it’s important to understand how lenders look at scenarios. The three main areas a client’s scenario is reviewed can be summed up in three main lending pillars:

Borrowing capacity

The most obvious of the factors – the borrowing capacity for the scenario is assessed. Income and liabilities are calculated using the lenders specific policies, which dependent on how they accept income, calculate liabilities and any other risk measure they may put in can create highly varied borrowing capacity results per lender.

Deposits

Any purchase must meet the sufficient lender to valuation requirements – this is achieved either through providing deposit funds and or equity from another security. Generally providing security from another property is undesirable, as this can cause long term structuring issues, so we focus on cash and equity released from properties to support purchases.

Credit worthiness

The credit file for all applicants, alongside any existing customer relationships with the lender is reviewed, generally through an automated system, however the human assessors can also review this. Highly active credit files (lots of applications in a short period of time), defaults, poor conduct with the lender can all impact your ability to borrow, even if you have sufficient borrowing capacity and deposits.

How you can extend your borrowing capacity with these through lending pillars

Borrowing capacity

Use an investment focussed finance broker. With the correct structuring, a broker can design your lending structure to feature the best parts of lenders policies, and play each lender off each other. If structured correctly, a strategic investment lending structure will extend your borrowing capacity 1.9-2.5x what any one lender will lend a scenario. Over the long term you will likely have your lending spread between 3-4 investment friendly lenders.

Diverse lending is the key

two options

Deposits

Many investors will initially view lenders mortgage insurance (LMI) as an expense which should be avoided at all costs. However if like many early investors you have limited equity/savings available for deposits, it can be prudent to utilise LMI sparingly as a tool to leverage into a larger portfolio sooner, which then enables you to gain more effective time in the market for growth and future equity.

LMI is charged on loans with less than a 20% deposit, and as the deposit size decreases the LMI cost progressively rises. Any industry tip to gain the best of both worlds for minimising your deposit size, whilst managing your LMI cost is to make purchases with a 12% deposit. At an 88% loan to value ratio, LMI is considerably less than above, so you can increase your ability to buy properties earlier, whilst saving LMI costs of circa 40% than a 10% deposit.

Be wary of using the lowest deposit possible (ie a 95% LVR), as this can result in a significant portion of your initial equity being eaten into by fees, leaving you having to grow more before you can start releasing any further equity.

When releasing equity, it’s prudent to release as much as you can, not when you need it. Relying on lenders to allow you to access the funds at a later date is a dangerous strategy, as changes to lender policy or your personal circumstances may preclude you from taking the equity at a later time.

Credit Worthiness

Keep your credit file as clean as possible. In Australia for every time you apply for finance, a credit card, pre-approval or the like, your credit score will reduce. It’s therefore imperative to not place any more hits on your credit file than required – as you’re already likely to be applying for a significant number of loans over your investing career. As always, pay your debts on time and pay your bills to avoid defaults being listed on your credit file. You can access your credit file from websites such as www.mycreditfile.com.au, which also provide you with subscription options which will alert you if any credit file applications, defaults or file accesses happen instantly.

How can I fast track my acquisition of properties?

1.     Build an investment strategy before you start investing. Talk to your finance strategist about your plans and they will be able to verify whether it’s feasible and whether any tweaks need to be made to assist in allowing for you to be continually successful with finance.

2.     Have a structured investment lending strategy – with a focus on structures and lenders which allow you to keep borrowing, not focussing on the lowest interest rate

3.     Look at additional strategies which can help grow your deposits/equity faster by manufacturing growth – renovations, development etc.

Summary

These are some the core tips which will give you the best return in terms of extending your capacity. Building a larger portfolio is achievable for many people, but it is a case of careful planning, and remembering that investing is a long term process. If you do “hit the wall” – don’t fear. Over time as your rents do rise and personal debt decreases, your capacity will rise back to a position that you will be able to continue investing.

 

 

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