Borrowing Power for Property Investors: What Lenders Look At Beyond Your Salary

### Understanding Serviceability Buffers In October 2021, the Australian Prudential Regulation Authority (APRA) issued a directive to authorised deposit-taking institutions (ADIs) to assess borrowers' serviceability with a minimum 3% buffer above the loan's interest rate (APRA letter to ADIs, 6 October 2021). This measure is intended to safeguard against potential interest rate rises, ensuring that borrowers can manage repayments even under less favourable conditions. ### Treatment of Rental Income For property investors, rental income is a critical component of their financial profile. However, lenders typically apply a shading to this income, often recognising only 70-80% of the projected rent in their serviceability calculations. This approach, standard among APRA-regulated lenders, accounts for potential vacancies and maintenance costs, which could impact an investor's ability to service the loan. ### The Impact of Credit Card Limits and HECS/HELP Debt When calculating borrowing capacity, lenders consider credit card limits rather than the actual balances. This is because the potential to draw on the full limit poses a risk to financial stability. Additionally, any outstanding HECS/HELP debt can further reduce borrowing power, as per the National Consumer Credit Protection Act 2009 (Cth) — noting that investment loans secured by residential property are generally exempt from responsible lending obligations under s.5(1) of the Act, though lenders still apply their own credit policies. These debts are factored into serviceability assessments as they represent fixed financial obligations. ### System-Generated vs Fully Credit-Assessed Pre-Approval Property investors often seek pre-approval to gauge their borrowing capacity. It's crucial to distinguish between system-generated and fully credit-assessed pre-approvals. A system-generated pre-approval offers a preliminary indication based on automated criteria, while a fully credit-assessed pre-approval involves a comprehensive evaluation of the borrower's financial situation by a lender. The latter provides a more reliable estimate of borrowing power, which can be advantageous in competitive markets. ### Strategies to Maximise Borrowing Power 1. **Reduce Credit Limits**: Lowering credit card limits can enhance borrowing capacity by reducing perceived financial liabilities. 2. **Document All Income**: Ensure all sources of income are well-documented and presented to lenders, including any supplementary or irregular earnings. 3. **Consult a Specialist Broker**: Engaging a mortgage broker with expertise in property investment can provide access to a wider range of loan products and strategies tailored to maximise borrowing power. 4. **Consider Ownership Structures**: Strategic ownership structures, such as trusts, can offer tax efficiencies and potentially improve borrowing capacity. 5. **Leverage Existing Equity**: Using equity in existing properties can increase the funds available for new investments, facilitating the growth of a property portfolio. ### SMSF Considerations: Limited Recourse Borrowing Arrangements For those investing through a Self-Managed Super Fund (SMSF), Limited Recourse Borrowing Arrangements (LRBAs) are governed by s.67A of the Superannuation Industry (Supervision) Act 1993. LRBAs have stricter Loan-to-Value Ratio (LVR) requirements, which can impact borrowing capacity. Investors must navigate these regulations carefully to ensure compliance while maximising their investment potential. ### Building a Multi-Property Portfolio Developing a substantial property portfolio requires strategic planning to avoid hitting a lending ceiling. By effectively managing existing debts, leveraging equity, and utilising the expertise of financial professionals, investors can enhance their borrowing power and continue to expand their property holdings. Steinhardt Property & Business has observed increased enquiries from investors seeking to optimise their borrowing strategies to facilitate portfolio growth. In conclusion, understanding the nuances of borrowing power and the factors that influence it is essential for property investors aiming to expand their portfolios. By adopting informed strategies and leveraging professional advice, investors can navigate the complexities of lending criteria and enhance their capacity to invest in the Australian property market.