Financing Multiple Investment Properties – What to do When You Hit Your Borrowing Capacity

If you are like most investors, your borrowing capacity will have a major impact on the growth of your portfolio. Your budget for each purchase will usually be highly dependent on how much money you can access. And your ability to take out further loans will dictate whether you can buy further investment properties.

But no matter how successful of an investor you are, there is a limit to how much you can borrow. So, what happens when you have reached your capacity and cannot borrow more? How do you keep your investment growing and continue making progress toward your goals?

How your borrowing capacity is calculated

When assessing a mortgage application, there are three key factors mortgage providers consider:

• How much security you have: When buying a property, you will usually need to put up part of the price as a deposit. This can be done using savings or by borrowing against equity in other properties you own. Either way, you will generally need security that is equal to at least 10% of the total purchase price.
• How much debt you can service: Lenders want to be sure that, if they approve you, you can comfortably afford the loan repayments. To check this, they will look for evidence of all your current sources of income, including rental income. They will then subtract your regular expenses and other liabilities (credit cards, loans, etc.) to calculate your disposable income.
• Your credit score: Most lenders will also want to know that you are financially responsible and have a history of paying on time. They will check this by looking at your credit file, which provides a detailed overview of your borrowing history. This includes what loans you have applied for, what loans you have taken out, and any payments you have missed.

While every lender will look at these measures, each will have their own rules for how they calculate borrowing capacity. Some will weight certain factors, like serviceability, more heavily than others, and some will largely overlook an applicant’s credit score. As such, it can be difficult to accurately estimate exactly how much finance you will be able to access.

Tips for increasing your borrowing capacity

If you have reached your borrowing capacity, or are near to it, it will be difficult to find further finance. Thankfully, there are a few things you can do to boost your borrowing power. This includes:

• Adding value to your existing properties: If the amount of security you have is limiting your borrowing capacity, increasing your equity could help. The best way to do this is to make strategic upgrades to the properties you already own. This could be as simple as updating fixtures and finishes or as complex as adding further bedrooms and bathrooms.
• Cancelling your credit cards: Credit cards will be counted toward your other liabilities regardless of whether you have money owing on them or not. As such, decreasing your limit or closing your credit accounts can help increase your borrowing capacity. You should also pay off your credit cards in full, each month, as this will increase your credit score.
• Refinancing your existing loans: If possible, extending the term or lowering the interest rate of your current loans can help boost your borrowing capacity. If you have other loans, like personal or car loans, consider rolling these into your new mortgage application. This will help reduce your repayments and should also increase your borrowing power.
• Reducing the number of loan applications: Each time you apply for a new loan, an enquiry will be recorded on your credit file. This can have a significant impact on your credit score, particularly if you make multiple enquiries in quick succession. As such, it is best to only apply for loans you are confident you will be approved for.
• Working with an experienced mortgage broker: The best brokers will know exactly what each mortgage provider looks at when reviewing loan applications. As such, they should be able to recommend the best lender for your individual circumstances. They should also be able to help you develop a tailored plan to maximise your borrowing capacity.
• Finding an investment partner: If you are unable to afford another property on your own, consider co-investing with someone you know and trust. This could be a family member, a friend, or another experienced investor you know well. Just make sure you formalise the partnership through the appropriate legal documents to help avoid any issues down the line.

Want more information?

If you would like to discuss other ways to optimise your borrowing capacity, give Search Party Property a call. We work with many of the country’s leading financial advisors and specialise in helping investors maximise their returns. To start this conversation, schedule your free property investment assessment session today.