Building a property portfolio requires the right financial structures that can help you finance your investment journey. If you fail to prepare, you might unwittingly restrict your borrowing capacity. Here are some mistakes people frequently make when funding their portfolio.
They implement cross-collateralisation
A lender who uses more than one property as collateral for a loan engages in cross-collateralisation. Although it is a common practice, it can have implications on your borrowing capacity in the future. When your debt levels increase, banks can restrict product choice or stop lending to you because they can interpret high debt with risk.
This results in a reduced likelihood for securing a loan, which means you might need to refinance or switch lenders. Take out separate loans for each new property, and establish independent lines of credit. Doing so will help you avoid issues about debt.
They choose a misaligned ownership structure
The wrong structure can hinder your ability to achieve your goals and cost you money in the long run. For example, if you buy property via a trust, this structure has tax implications which make them a less appealing choice to lenders.
Speak to your accountant and your broker about what type of ownership structure can ensure your funding. They could also explain the implications of this structure on your future borrowing capacity.
They do not understand joint or several liability loans
Borrowers who want to increase their serviceability can use joint or several liability loans. However, there are also implications for each. Jointly borrowing will cause each party to be individually responsible for the debt. However, lenders will only consider half of the rental income from this type of property.
This is not the case for all mortgagers, though; speak to a broker who has extensive knowledge of property investment to ensure that you are headed in the right direction.
They have unnecessary debt
Investors often forget about their credit card limit when planning for their property investments. Banks consider credit card limits as debt, and this can affect perceived serviceability, which limits your borrowing power.
Taking on additional overheads or applying for personal loans can also contribute to this situation. Make sure how your expenses and debts add up and affect your eligibility to receive a loan for an investment property. A quick solution would be cutting back on unused credit cards or paying debts before applying for a mortgage.
They have too many credit enquiries
Borrowers who submit too many enquiries are at a disadvantage since these are part of their credit report. Future lenders can read this report and view the many incidences in a negative light, which could prevent you from securing a loan.
Speak with a broker who can carry out pre-approval, which will help you determine your chances for getting approved.
Australian banks are becoming stricter with their serviceability criteria because of recent developments in lending in the country. Investors must understand the various factors that contribute to or take away from their borrowing capacity. For those looking to make the most out of their investments, speaking with an investment expert is essential.
Get a better loan and secure your investment future with Finance Corp. With access to over 25 top lenders and hundreds of products, our brokers in Perth can provide you with comprehensive guidance for investing in a mortgage. Make an inquiry today to learn more.