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HOW TO GROW A

MULTI-MILLION
DOLLAR PORTFOLIO

Discover how to win in property


investing & get the banks
working for you.
All Rights Reserved
No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic,
mechanical, photocopied, recorded, scanned, or otherwise, without
the prior written permission of the author(s).

Disclaimer
Any information offered by the author(s) of this publication is of a
general nature and may not be suitable for some people. No
individual financial, taxation or legal needs or goals have been taken
into account in the information provided. You should always seek
independent professional advice about specific financial, taxation
and legal decisions. The author(s) of this publication disclaim all and
any responsibility or liability in respect of information detailed or
omitted (or the consequences thereof) from this publication or any
other content provided or meetings held with the author(s).

*** Please note that all charts & modelling in this e-book is based on lender calculators
& lender policy as at 1 June 2017. Lending policy changes over time.
About the
AUTHORS

Redom Syed Curtis Stewart


CEO & Founder Director & Finance Strategist
of Confidence Finance

Redom Syed is the CEO of Confidence Finance, Curtis Stewart is the brains behind Confidence
a mortgage broking firm that specialises in Finance. With a First-Class Honours degree in
educating property investors about how to Economics, 5 years working in finance at Federal
correctly source and structure finance to build Treasury & years working at KPMG in the
successful property portfolios. Redom has been corporate sector.
recognised as one the best young brokers in the
industry and has personally settled over $100 Curtis brings with him quite the resume! Curtis
million in lending. He has also been described as embodies the concepts laid out this book and is
a Young Gun property investor after well on his way to building a successful
accumulating over a $4 million+ portfolio. multi-million-dollar portfolio.

Recently married, Redom lives in Sydney. In Curtis enjoys a good game of golf and football.
addition to finance & property, Redom’s
passions include family & football.
Table of
CONTENTS
INTRODUCTION 01 PART 3
HOW TO USE YOUR BORROWING 20
PART 1 CAPACITY TO GROW A MULTI-MILLION
WHAT IS BORROWING CAPACITY 02 DOLLAR PORTFOLIO
How lenders calculate your 03 The finance multiplier 21
borrowing capacity Comparing borrowing capacity across 23
Net income 04 the lending market
Assessed expenses 07 How do property investors diversify 26
Available surplus income 11 their lenders to borrow more?
Worked examples 12 What is the biggest factor driving 27
total borrowing capacity?
PART 2
CALCULATING CHANGES TO 15 PART 4
YOUR BORROWING CAPACITY HOW TO GROW A MULTI 30
Salary/Business income 16 MILLION DOLLAR PORTFOLIO
Rental income 16 Phase 1 – Foundational lenders 33
Credit card limits 16 Phase 2 – Mid-tier lenders 34
Discretionary expenses 17 Phase 3 – Aggressive lender 35
Dependants 17
Interest only repayments 17
HECS/HELP debt 18
Novated car lease 18
Owning your own home vs. renting 18

THIS E-BOOK WILL EDUCATE YOU ON


• How every lender calculates your borrowing power.

• How to calculate changes to your borrowing power.

• How to multiply your borrowing capacity and build a larger investment portfolio.

• How an average income household can build a multi-million dollar portfolio in


the 2017 post APRA environment.

• The finance risks you should consider when building a large investment portfolio.
INTRODUCTION
Property investing is a game of finance – learn
how to play and you’re likely to win!

W
elcome to this e-book for property investors looking to grow property
investment portfolios.

Property investing has become a national sport in Australia following the latest
property boom. With over $7 trillion in value, property has undoubtedly become the
asset of choice for Australians to store and grow wealth. Property and property finance
go hand in hand. For most mere mortals, building a property portfolio is impossible
without relying on finance.

For those seeking to build large portfolios, property investing is a game of finance. Yet
few understand how the game works.

The good news is correctly sourcing and structuring property finance to build an
investment portfolio is a science that can be broken down into a few key fundamentals.
Learning these fundamentals can give you back control and get the banks working to
achieve your investing goals.

This e-book seeks to educate property investors across the country about how your
borrowing capacity dictates what sized portfolio you can grow, and how to structure
your finances to maximise your borrowing capacity and your potential portfolio.

Having the right financing structure can increase your borrowing capacity by over 100%,
which could be the difference between getting stuck after 1 or 2 investment properties or
being about to continue growing to achieve the larger portfolio you desire.

Whether you’re making your first property purchase or your tenth, this resource should
help expand your knowledge base and get your finances in better shape.

01
PART 1
WHAT IS BORROWING CAPACITY

F
or most property investors, your capacity beyond what one individual lender
borrowing capacity is the single most is willing to lend. This is a key concept, there
important factor in determining how are ways to take your financial situation and
large of a property portfolio you can build. present it to different lenders in a way that
Investors hungry to grow successful allows you to go further. So it not just the
investment portfolios usually need as much strength of your financial situation that
of the ‘banks money’ as possible. counts, it’s how clever your financing
strategy is too.
Your borrowing capacity refers to what
banks are willing to lend to you. It is about In this e-book, we begin by explaining how
you demonstrating the financial capacity to banks calculate your borrowing power for
make repayments every month. Lenders use an individual loan application. Here we
‘serviceability calculators’ to determine dissect serviceability calculators into
what they are willing to lend to you. individual components to better understand
the science of how lenders determine your
Naturally, the most important consideration borrowing capacity. We then extend this to
is your income. In simple terms, the greater draw conclusions about exactly how your
your income, the greater your potential borrowing power changes as your situation
borrowing capacity is. While that theory is changes.
great, increasing income while maintaining
sleep and a healthy life, isn’t a realistic Armed with this detailed knowledge of
option for most. serviceability calculators, we then explain
how property investors can use variances in
The good news is that finance strategists individual calculators to deploy strategies to
can deploy several borrowing power multiply your borrowing capacity and build
techniques to extend your borrowing larger property investment portfolios.

Your financial Your financing


position strategy

Your potential
borrowing capacity

02
HOW LENDERS CALCULATE
YOUR BORROWING CAPACITY
Expanding your borrowing capacity starts to lend to you based on your current
by working out how banks determine what position or your recent historical
they are willing to lend to you. position, not your future position. This
offers you the flexibility to adjust your
Understanding the foundations will allow
personal income/expenses at certain
you to expand your borrowing capacity to
points in time to expand your borrowing
build large property portfolios.
capacity. For example, those that are
family planning at some point in the
In Australia, just about every lender calculates future often upgrade their homes prior
your borrowing capacity by calculating your to having a child, as their borrowing
income and then subtracting what they deem capacities may fall if they seek finance
to be your expenses. The money left over later in their lives.
every month is what the banks will use to
To understand how lenders calculate your
calculate your borrowing capacity.
borrowing power, its best to begin by
dissecting each individual component of a
Although a loan term is usually for 30
serviceability calculator.
years, banks assess what they are willing

Assessed Available
Net Income Expenses Surplus
Income

This surplus is used by lenders to calculate

Individual Lender Borrowing Capacity

03
NET INCOME

Income treatment is quite similar The longer the history you can show, the
between individual lenders. Different greater the chance all of it can be used
types of income are treated differently. in lender serviceability calculations.
Generally, the more stable the income,
the more the banks will include.

Lenders will take 100% of this income for servicing

Salary Self-employed
Income

Lenders will take 80% of this income for servicing

Bonus & Overtime & Rental Other


Allowances Investment
Commissions Income Income

04
SALARY
Lenders will usually allow 100% of your salary income to be included in
their serviceability metrics. They will of course apply standard tax rates
and use your net income, as this is what’s available to you to repay the
loan every month. Compulsory superannuation payments are
excluded from servicing calculators.

Different types of employment may be treated differently. As a general guide, banks will
either include all your salary income or none of it. For example, with some lenders you need
a 6-12 month history of employment in your role. Without this, they won’t include any of
your income in their calculations and you won’t be able to borrow. Conversely, there are
lenders that will accept your employment income from day 1.

Salaried income that involves variable rates of income, like seasonal employment and casual
employment, usually need longer histories to be demonstrated. Nonetheless, some lenders
allow three months’ history while others require twelve.

PROFITS/SELF-EMPLOYED
For those that are self-employed, lenders examine the business’s net
income (profit) to determine serviceability.

If you’ve paid yourself a salary, they add this back to the profit figure
and use 100% of the net income. Most lenders require two years tax
returns to evidence this income, but some lenders like CBA, Westpac
& ANZ can use the latest year only.

Lenders will also ‘addback’ certain expenses to your profit figure and include this in your
income. These include depreciation expenses, interest charges on loans already expensed,
and additional superannuation payments made beyond compulsory payments.

RENTAL INCOME
Lenders usually include 80% of any rental income earned. Lenders will
include the future rental income that is about to be earned if
purchasing an investment property.

05
OVERTIME & ALLOWANCES
Lenders usually allow 80% of overtime income to be included in
serviceability assessments. This is because overtime is considered
more variable/uncertain, hence this income is partly shaded in
serviceability calculations. With some lenders, allowances are included
at 100% as they are typically part of borrower’s remuneration package.

BONUSES, COMMISSIONS
Lenders allow 80% of bonus and commissions income to be included.
Usually you require 12 month history for commission income and 2
years history to evidence bonus payments.

OTHER INVESTMENT INCOME


Investment income in the form of dividends, distributions, etc may
be included. These are usually included at 80% of their true value,
and requires 2 years tax return evidence to be included in
serviceability assessments.

DID YOU KNOW…


Uber drivers who work via an ABN arrangement are considered
self employed by lenders and require two years’ tax returns to
evidence their income with most lenders.

In addition, banks require your ABN to be active for at least 2 years before
recognising this income.

As such this income may not be able to be included in your serviceability.


Interestingly, if you work as a salaried worker, this income can be included from your
first payslip (1-4 weeks).

06
ASSESSED EXPENSES

Lender serviceability calculators are usually Banks calculate individual components of


more conservative than your actual income your expenses, apply loadings to individual
and expense situation. This is largely due to components, and then aggregate all the
‘loadings’ that are applied to your actual individual expenses to come up with your
expense figure. While income is treated total assessed expense figure. Continuing
similarly between lenders, there are large with a scientific breakdown, lets dissect the
differences in the way banks calculate your expense side of serviceability calculators:
expenses.

Rent

Existing INV
Credit Cards Living Expenses Housing expenses
Mortgages Debt

Discretionary Non-discretionary Existing PPOR


expenses expenses Mortgage

LIVING EXPENSES
This is your day to day living expense. It includes expenses like
groceries, food, clothes, child-care, dry-cleaning, etc. It does not
include rent or your housing expenses, which are considered
separately.

Lenders take the higher of your declared living expenses or their minimum living expense. For
those that are frugal in their living expenses, unfortunately banks will always include their
minimum living expense.

LENDER CALCULATED MONTHLY MINIMUM LIVING EXPENSES


YEARLY INCOME
$100,000.00 $200,000.00
Single $1,775 $2,393
Couple $2,704 $3,250
Couple 1 child $2,886 $3,440
Couple 2 child $3,414 $3,970
Couple 3 child $3,658 $4,204

07
Lenders usually have minimum expense figures that apply to your household situation
(single, couple, children, etc). Some lenders apply higher living expenses depending on the
postcode of where you live. The theory is, if you live in Paddington your expenses are likely
to be higher than if you live in Campbelltown.

RENT
If you are renting, lenders will include your rent as an expense. They
will not apply any loadings to your rent expense. That is, if renting for
$1,500 a month, a $1,500 expense will be included in your calculation.

EXISTING MORTGAGE
Lenders will include your repayments on any mortgages (investment
or owner occupied) into their serviceability calculations. They will do
this regardless of whether the debt is self-sustaining and paid for via
rental income.

Most lenders apply a buffer well above your actual repayment on your existing mortgage
repayments. For property investors, mortgage debt buffers are the largest buffers lenders put
in place on their mortgage calculator. The justification is that mortgage debt is usually
considered risky and subject to change (interest rates, repayment changes). This buffer
underpins Australia’s financial stability framework and forms a ‘first line of defence’ for
borrowers and lenders in case economic conditions change.

Interestingly, this also means that owners of their own homes with mortgages are penalised
with loadings in their serviceability calculations, while renters are not.

The vast majority of lender serviceability calculators take about double your actual repayment
for any interest only loan. That is, if you are paying $2,000 a month on your existing debts, the
lender will include approximately a $4,000 expense in your calculations.

After dissecting different lender calculators, the treatment of mortgage expenses is usually the single
largest differences between ‘high serviceability’ lenders for property investors and ‘conservative
serviceability’ lenders. There are some serviceability calculators from smaller lenders that will apply
no buffers or much smaller buffers than the above. Differing treatments in existing mortgage debt
offer property investors scope to ‘swap lenders’ to grow their portfolio. More on this later.

08
The repayment type on your existing debts will also impact the expense figure used by lenders.
Typically, lenders apply a higher assessment rate on interest only debt than principle and interest
debt. The longer the interest only period, the higher the assessment rate.

Margin loans and other investment loans are considered in a similar manner.

CREDIT CARD LIMITS


Credit cards are treated very harshly. Banks include a 36% annual
repayment figure on the credit card limit – regardless of whether you
use the card or not. That is, a $10,000 credit card limit will include a
$3,600 yearly expense figure into serviceability.

One of the most common exercises for clients with marginal borrowing
capacity is to close credit cards prior to applying for mortgage finance.

09
INDIVIDUAL LENDER BORROWING CAPACITY

Now that we have unpacked individual components on a lender serviceability calculator,


lets examine what lenders do once they have your available surplus income.

Self-employed Bonus &


Salary
Income Commissions

Overtime & Other Investment


Allowances Rental Income
Income

Existing
Rent
Mortgages

Living Expenses Credit Cards

Available Surplus Income

This figure is used to calculate your


individual lender borrowing capacity.

10
AVAILABLE SURPLUS INCOME

Your available surplus income will be differences mean that each lender is willing
used to determine how much banks are to lend a different amount.
willing to lend to you for an individual
loan. Banks will allow you to leverage Further, lenders will also produce different
your surplus income and provide you borrowing capacities even if they arrive at
with a maximum borrowing capacity. the same figure for available surplus
income. This is because different lenders
If you are seeking a loan below this have different ‘assessment rates’ on the
maximum, lenders will be happy to lend to new debt that you are requesting. These
you. If you are seeking a loan above this only vary marginally between lenders, but
maximum, lenders will cap you to their usually fall within a 7 - 8% assessment rate,
maximum. or at least 2 - 2.5% above the standard
variable rate in higher interest rate
Ever wonder why different online calculators environments. These assessment rates are
produce different results for how much you used to ensure you can meet repayments
can borrow? The reason is every bank has into the future in different interest rate
their own unique way of working out your environments.
income and your assessed expenses. These

11
WORKED EXAMPLES

So now that we have dissected exactly Below are three examples of how lenders will
how lenders calculate your borrowing allow you to leverage different income and
capacity, lets put this all together and see expense profiles. In this example, we explore
how it looks in some real life examples. how much someone can borrow for an
owner occupier loan, on a principle and
interest repayment over 30 years.

Scenario 1 Starting out


Scenario 2 $1 million portfolio
Scenario 3 $2 million portfolio

Income: $70k each


Rental expense: $500 p.w.
Credit card limits: $6k total

Income: $70k each


Rental expense: $500 p.w.
Credit card limits: $6k total
Existing property: $1 million
Existing mortgages: $800k
Interest rate: 4.5% (IO)
Repayments: $3k p.m.
Rental income: $50k p.a.

Income: $70k each


Rental expense: $500 p.w.
Credit card limits: $6k total
Existing property: $2 million
Existing mortgages: $1.6 million
Interest rate: 4.5% (IO)
Repayments: $6k p.m.
Rental income: $100k p.a.

12
BORROWING CAPACITY CHART

BORROWING CAPACITY WITH DIFFERENT LENDER


CALCULATORS AS YOUR INVESTMENT PORTFOLIO GROWS

$1,000,000
$900,000
$800,000

900,000
860,000

930,000
$700,000

860,000
790,000
$600,000

255,000
$500,000
$400,000
460,000

575,000
50,000

$300,000
$200,000
$100,000
$0
Conservative calculator Mid-tier calculator Aggressive calculator

$0 portfolio size $1mil portfolio size $2mil portfolio size

As you can see, expenses are the same larger and larger the more debt any
across each scenario: minimal living property investor holds. That is, as a
expenses, 6k credit card, no other debts. The property investors financial affairs become
intention of this comparison is to show how more complex and sophisticated, the
lender calculators change for property differences between what each bank is
investors specifically as their existing level of willing to lend start expanding.
debt increases. This analysis has also been
split out across an aggressive lender, a This is because lenders have different risk
mid-tier lender and a conservative lender to appetites. For example, ING Direct like to
give a flavour of the variation that exists target property owners and mum and dad
between lenders in the market. investors who have 1 or 2 investment
properties. Meanwhile, larger institutions
What is noticeable is that the variances in like to target property investors with larger
borrowing capacity between lenders gets stocks of mortgage debt.

13
FALL IN BORROWING CAPACITIES BETWEEN LENDER
CALCULATORS AS DEBT RISES
-$0 porfolio size $1mil portfolio size $2mil porfolio size
$0

-400,000
$100,000

-70,000

-645,000
$200,000

-140,000
-810,000
$300,000

-325,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
Conservative calculator Mid-tier calculator Aggressive calculator

14
PART 2
CALCULATING CHANGES
TO YOUR BORROWING CAPACITY

C
ontinuing our dissection of lender We look at individual components of the
serviceability calculators, in this serviceability calculator to unpack how you
section we explore exactly how can ‘adjust’ your way to greater borrowing
specific changes to your situation can capacities.
impact your total borrowing capacity.

Rental Credit Card Dependants Novated


Income Limit Car Lease
Discretionary
Salary Expenses
Interest Only HECS/HELP Owning vs.
Business Repayments Renting
Income Debt

15
SALARY/BUSINESS INCOME
Increasing the average income earners salary by
$10,000 will increase your borrowing power by ~$75,000.
The impact of this will fall for higher income earners, as they will pay a
higher marginal tax rate. This is often the most powerful way to increase
your borrowing power long term.

RENTAL INCOME
For the average income earner,
a $10,000 increase in rental income will
increase your borrowing power by ~$50,000.

Lenders will generally include 80% of rental income. Therefore, the increase in borrowing
capacity is lower than salary increases. Note there is also an implied rental yield cap with many
lenders, some lenders won’t take rental yields above 6% into consideration (CBA, NAB).

Also, when there is investment debt against rental income earned, some lenders will allow those
interest payments to be ‘added’ back to offset the taxation consequences of this income
(negative gearing). When included, the rental income impact gets closer to salary rises.

CREDIT CARD LIMITS


Increasing your limit by $10,000 will
reduce your borrowing power by ~$35,000.
Credit card limits are generally assessed at 36% p.a. of the credit limit
(regardless of whether you use it or not). This reduces your borrowing
power by around $35-45k. Note a few lenders will exclude credit card
limits if repaid in full every month.

16
DISCRETIONARY EXPENSES
Increasing your expenses (above bank
minimums) by $10,000 p.a. will decrease
your borrowing power by ~$120,000.
Expense calculations come out your net income. Therefore, increasing
your expenses has a larger impact on your available surplus.

DEPENDANTS
Having another child reduces
your borrowing by about ~$35,000.
Increasing the number of dependents adds at least $250 p/m to your
monthly minimum expenses, depending on your current income level
and the lender used.

Additionally, having children often corresponds with an income drop (temporarily) too.
Therefore the full impact of having children on your borrowing capacity is usually far
greater than this.
P.s. I’m hesitant to include this fact in this e-book – I’ve once had a call from a
concerned to be father asking me to convince his wife to delay having another child!

INTEREST ONLY REPAYMENTS


Going Interest only on a loan for 5 years instead
of Principle and Interest repayments on a $500,000
loan will reduce your borrowing power by ~$35,000.

In recent times, lenders have been applying higher effective assessment rates for interest
only debt. Now, most lenders will assess a 5 year interest only term over a 25 year loan
period instead of 30.

For a $500k loan, this increases the assessed repayment by a little over $200 p/m, having
about a $35,000 impact on your borrowing power.

17
HECS/HELP DEBT
Having any HECS/HELP debt on a median income
will reduce your borrowing power by ~$60,000.
Those student loans can come back to bite hard! HELP repayments are
based on a sliding percentage depending on your income. On an
$80,000 income, 6% of your income is withheld to repay this loan. That
means an additional expense of $400 p/m. This reduces your borrowing by around $60,000.

Therefore, for some at the margins of borrowing capacity that have a small HELP debt, it may
make sense to repay this loan. Repayments are based on income, not loan balance/size.

NOVATED CAR LEASE


Obtaining a novated car lease for a $20,000 vehicle
that includes all running expenses instead of a personal
loan will reduce your servicing by ~$40,000- 60,000.
Novated car leases usually include things like interest, fuel, car servicing,
etc, into the monthly repayment amount, whereas personal loans usually
have lower repayments because they only include the interest repayment. The other car costs
can be included in the banks minimum living expenses for those that have personal loans.
Therefore, car leases do more damage as they potentially ‘double dip’ the living expenses.
Note the impact on borrowing power varies significantly depending on the specific arrangements of the lease.

OWNING YOUR OWN HOME VS. RENTING


Deciding to buy a $500,000 property (100%
financed) to live in vs rent @ $500 p/w will reduce
your borrowing power by approximately ~$180,000.
The assessed expense for a $500,000 owner occupier mortgage debt is
around $3.4k p/m (despite only paying $1.75k p/m in interest). If instead,
that someone rented the same place at $500 per week ($2,166 p/m), lenders will take it exactly
at $500 p/w in servicing assessment. No loading applied for rental expenses.

In this scenario, that’s a whopping ~$1,250 difference in your monthly expenses. Therefore,
under some lender calculators, you’ll be able to borrow $180,000+ more for investments by
making the choice to rent instead of buy in this scenario.

18
IMPACT ON BORROWING CAPACITY FROM DIFFERENT CHANGES

HOW DIFFERENT CHANGES IMPACT YOUR


BORROWING CAPACITY
$100,000

$50,000 75,000
50,000
$0
-35,000 -35,000 -35,000
-60,000 -50,000
$50,000 -120,000

-180,000
$100,000

$150,000

$200,000

HECS debt
Change to IO

Novated lease
$10k CC increase
$10k rental increase

Own vs. rent


$10k salary increase

New dependent
$10k expense increase

19
PART 3
HOW TO USE YOUR BORROWING CAPACITY TO
GROW A MULTI-MILLION DOLLAR PORTFOLIO

Ever wonder how borrowers on average time. This is done by carefully structuring
incomes manage to borrow millions of your loans and using different lending
dollars? You may be doing the math from institutions over time to maximise your
the sections above and thinking the borrowing capacity. At the end of the day,
numbers don’t match up. If lenders apply the section is about how property investors
such large buffers to mortgage debt, how go from one loan application to many!
does a property investor who accumulates
more and more debt continue to borrow? Whether you are on your first investment or
your tenth, lenders will use their
In this section, we use the knowledge from serviceability calculators, calculate your
dissecting individual lender calculators income and assessed expenses, and will
across the market to ‘unlock’ borrowing lend to you based on what ‘surplus’ is
capacity and build a portfolio. available. However, these rules produce
different results with different lenders.
You can use this knowledge to unlock Property investors can take advantage of
borrowing capacity in dynamic situations differences between lender calculators to
involving multiple loan applications over build larger property investment portfolios.

20
THE FINANCE MULTIPLIER

By using the unique differences in lender


calculators to your advantage, you can
‘swap’ lenders as you grow your portfolio in
a structured way to expand your borrowing
capacity. Property investors can grow a
larger portfolio by using a pool of lenders
than by having all their loans with one
individual lender. In fact, property investors
can borrow a ‘multiple’ of their borrowing
power with an individual lender. We call this
the ‘finance multiplier’.

In today’s lending environment, this


finance multiplier is over 100%! That is, by
correctly structuring their finances and
diversifying their lenders over time,
property investors can borrow over double
what they could have otherwise.

FINANCE MULTIPLIER FORMULA

Your borrowing capacity with an individual lender

The finance multiplier

Your maximum potential borrowing capacity

21
To unpack how this works, firstly, let’s Now, rental income is treated consistently
examine the unique characteristics of between lenders. However, investment
property investors and how this feeds mortgage debt expenses are treated
through to individual lender serviceability drastically different by different lender
calculators: calculators. This means that as property
investors grow their portfolios, there is a
• Rental income forms a larger proportion greater divergence between what
of their income. Property investors individual lenders will allow you to borrow.
invest to earn rental income (and capital
gain). As they accumulate properties, Over time, property investors continue to
their rental income grows. accumulate more and more mortgage
debt. Lenders apply larger and larger
• Investment mortgage debt expenses buffers to these debts. This means the
are higher than most other borrowers. ‘assessed’ expenses in serviceability
Property investors rely on lenders to calculators continue to rise with each
finance their portfolios. As their individual investment purchase more than
investment portfolio grows, so too the rental income that is created. The net
does their investment debt. Over time, effect is lenders will lend less and less to
this quickly becomes a property you as you grow your investment portfolio.
investors largest ‘expense’ in their
serviceability calculations.

22
COMPARING BORROWING CAPACITY
ACROSS THE LENDING MARKET

To demonstrate this, we have modelled out income & debt size grows, with all other
exactly how substantial these ‘variances’ in factors remaining equal. That is, the change
borrowing capacity can be. The below chart in borrowing capacity as the couple goes
shows what borrowing amount individual from no investments to being an active
lenders will allow for a couple as their rental property investor with a $2million portfolio.

COUPLE, 70K INCOME EACH, RENTAL EXPENSE $500


PW, CC OF $6K, DEBT CHANGES FROM $0 TO $2MIL

Income: $70k each


Rental expense: $500 p.w.
Credit card limits: $6k total
Rental yield: 5%

Existing investment ranges


from $0 to $2 million

23
BORROWING CAPACITY FOR PROPERTY
INVESTORS AS DEBT SIZE INCREASES

$1,200,000
Liberty

$1,100,000

$1,000,000

$900,000

$800,000 Pepper

$700,000
Borrowing Capacity

$600,000

Westpac
$500,000

$400,000
FirstMac
$300,000 St George
CBA
$200,000 Adelaide
NAB
$100,000
Macquarie
$0 ANZ

-$100,000

-$200,000 ING

$0 $1,000,000 $2,000,000

Property portfolio size

This analysis is based on lenders servicing policies in July 2017. Lenders change their
policies regularly and the market generally adjusts to regulatory pressures. At the time of
reading lenders may have different policies to July 2017 and may sit higher or lower on the
chart than displayed.

24
CHART EXPLANATION

As you can see on page 24 the borrowing This chart also gives a good visual
power available between individual lenders representation of the different lending
for this couple when they have no appetites in the market. As investors exhaust
investment debt ranges between $850,000 - their borrowing capacity with lenders at the
$910,000 with the majority of lenders. bottom or middle of this chart, they will
Compare this with the borrowing power need to move up the vertical arrow to
range that the same couple has once they lenders with more favorable servicing
build their property portfolio. Their calculators in order to continue borrowing.
borrowing power ranges from - $200,000 to However, as you move up the arrow and
over $1.1million. You can’t have a ‘negative’ borrow more aggressively, the finance risk in
borrowing power, but what this means is your portfolio also increases.
that some lenders believe this couple is
‘overleveraged’ and will require them to Conservative serviceability lenders stand out
reduce their overall portfolio before lending by being near the bottom of the lender chart
any money at all. (ING), most lenders have middle tier
serviceability (CBA, NAB, etc) and there are a
As you can see, increasing the amount of couple aggressive serviceability lenders that
existing debt you hold changes borrowing stand out (Pepper & Liberty).
capacity dramatically between lenders. This
demonstrates how important lender choice The aggressive serviceability calculators add
can be for different objectives, like a first smaller ‘loadings’ to property investors
timer buyer looking for an owner occupier existing debt obligations. That means
(the green end of the horizontal arrow) assessed expenses are lower with these
compared to an investor looking to continue calculators and therefore they have a higher
growing their portfolio (the red end of the net surplus to leverage. This results in a
horizontal arrow). greater borrowing capacity.

25
HOW DO PROPERTY INVESTORS DIVERSIFY
THEIR LENDERS TO BORROW MORE?

For property investors seeking to maximise


their borrowing capacity, it makes sense to
begin your investing journey with a suitable
foundation lender, that offers you flexibility
to revalue and easily conduct equity
releases. The ability to release equity is an
increasing powerful tool for property
investors as their portfolio grows. It is also
best to ensure that lenders with an
‘aggressive serviceability’ calculators are not
used early, as they are more valuable when
you leave them until you really need the
additional servicing – generally at later stage
of your investing journey.

Once your borrowing capacity is ‘soaked up’


with these foundational lenders and they are
no longer willing to lend to you, property
investors can swap to an aggressive lender
and continue to accumulate debt. This
allows you to ‘multiply’ your individual
serviceability to produce a greater overall
borrowing capacity.

There will come a stage in a property investors


journey where most middle/conservative tier
lenders are no longer willing to lend to you. At
this point, the aggressive calculators will
continue to produce positive borrowing
capacities, expanding a property investors
ability to borrow.

26
WHAT IS THE BIGGEST FACTOR
DRIVING TOTAL BORROWING CAPACITY?

All investors have a borrowing power wall that is the


maximum lenders are willing to lend to.
There are techniques to expand borrowing accumulate over time, there is no
capacities like removing credit cards and substitute to increasing your income. In
deploying structured investment lending. the next chart we have modelled out
These can help expand capacities to a maximum borrowing capacities for
point, but they do have restrictions as to different income profiles (for a couple) to
how far they can take property investors. illustrate the power of increasing
income. The upside is, increasing
For those advanced property investors, income has no real upper bound (just ask
should you wish to build massive Mark Zuckerberg!).
investment portfolios and continue to

27
THE FINANCE MULTIPLIER

MAXIMUM BORROWING CAPACITY AS


INCOME AND RENTAL YIELDS CHANGE

$100k (3% yield) 510,000 380,000

$100k (4% yield) 565,000 445,000

$100k (5% yield) 630,000 540,000

$100k (6% yield) 715,000 650,000

$150k (3% yield) 1,085,000 680,000

$150k (4% yield) 1,200,000 790,000

$150k (5% yield) 1,320,000 940,000

$150k (6% yield) 1,495,000 1,110,000

$200k (3% yield) 1,660,000 945,000

$200k (4% yield) 1,800,000 1,105,000

$200k (5% yield) 2,000,000 1,300,000

$200k (6% yield) 2,225,000 1,560,000

$250k (3% yield) 2,185,000 1,200,000

$250k (4% yield) 2,400,000 1,405,000

$250k (5% yield) 2,660,000 1,660,000

$250k (6% yield) 2,990,000 2,000,000

$300k (3% yield) 2,740,000 1,455,000

$300k (4% yield) 3,015,000 1,700,000

$300k (5% yield) 3,345,000 2,010,000

$300k (6% yield) 3,750,000 2,430,000

$0.00 $1.00 $1.50 $0.00 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50
millions

Sustainable borrowing power Aggressive borrowing power

28
DID YOU KNOW…
For those that have been property investing from 2014 onwards,
you may be aware that there have been significant shifts in
borrowing capacity.

The main shift has been in relation to the ‘finance multiplier’. Three years ago, there were
half-dozen or so lenders that had an upward trajectory in borrowing capacities as
portfolio size increased. This really meant that property investors could multiply their
borrowing capacity 600%+ instead of the ~100% figure that it is today.

Furthermore, the Australian Prudential Regulatory Authority (APRA) have also tweaked
lending policies to reduce the amount of income that could be included in servicing
assessments and increased the assessed expenses used by banks. That meant individual
lender calculators produced lower overall borrowing power.

In total, this has meant a far smaller portfolio size potential today, than if we were
completing this analysis in the 2014 environment.

29
PART 4
HOW TO GROW A MULTI
MILLION DOLLAR PORTFOLIO

To bring all these concepts together, let’s • This is a serviceability and risk based post
apply this to a case study to demonstrate to show how one can borrow large
how one can borrow large amounts of amounts of money sustainably to build a
money sustainably to build a successful successful property portfolio.
property portfolio.
• We are also assuming a 5% rental yield on
To start with, let’s clarify a few points to the investment properties Greg and Mary
narrow the scope of this example down. purchase.

GREG AND MARY’S SCENARIO


Greg and Mary are a young, high-income At the outset, they are clear in what they
couple that decide to use property to create want and decide that they want enough
wealth and help them retire. Greg and Mary funds to retire in 20 years. In 20 years, they
earn $100,000 gross each, have no children, will reallocate their capital grown to income
rent at $400 per week, have minimal driven assets.
expenses and no other debts.

30
DETAILED SUMMARY OF GREG AND
MARY’S SITUATION AND ASSUMPTIONS

Income: $100k each

Rental expense: $400 pw

Credit card limits: $6k total

Dependants: None
No existing debts

Minimal living expenses

Purchasing at 5% rental yields

PLANNING & STRATEGY


Greg and Mary begin by making an investment plan, a finance plan and
a risk management plan. These plans set the tone for what they are
trying to do and guide their purchases and decision making over time.
Importantly, they work together to build, grow and protect their
portfolio over time.

Greg and Mary will maximise their borrowing capacity by using a structured and ordered
approach between foundational lenders, aggressive lenders and then calculated risky
options to grow their portfolio. They have matched lender selection with their properties,
which helps balance finance risk over time.

INVESTMENT PLAN
Greg and Mary want to build an investment portfolio as large as
sustainably possible that grows in value over the next 20 years. They
plan to aggressively acquire assets as soon as possible and let time
work in their favour.

Yield will only pay for their properties, not lifestyle. They want an average 5% yield across
their portfolio, so as to not impinge on their lifestyle.

31
They are flexible with the number of assets they plan to acquire, but instead focus on
quality assets that will grow over time. This includes some lower yielding assets and
some higher yielding ‘cash cows’. Greg and Mary have their mortgage broker test their
serviceability with a range of different lenders across the market. This analysis produces
the following results: They will invest across Australia, to diversify their investment risk.

FINANCE AND RISK MANAGEMENT


Greg and Mary want to have a plan to be buffered for changes in interest
rates, finance risks, property risks. The intend on being prudent to cover
6-7% interest rates at P&I repayments over the course of their journey.

They will seek 80% LVR’s across the board as a method of managing
finance risk. They will not seek to re-access any additional equity to
continue purchasing.

FINANCING THEIR PURCHASES


Greg and Mary have their mortgage broker test their serviceability
with a range of different lenders across the market. This analysis
produces the following results:
• They can borrow $2.2 million from conservative lenders.
• They can borrow another $1 million from mid-tier lenders.
• They can borrow a further $1.2 million for the most aggressive
lenders in the market.

Their broker has arrived at these calculations by making the following assumptions:
• Greg and Mary will achieve a 5% rental yield on their purchases.
• The interest rate on the debt Greg and Mary take on will be 4.5%.
• Greg and Mary borrow on interest only terms as they are acquiring investment
properties. In Greg and Mary’s case we are assuming having their debt on interest only
terms maximises their tax position and fits with their wealth creation strategy.

32
PHASE 1 – FOUNDATIONAL LENDERS

Greg and Mary use these borrowing capacity


calculations to start planning out their
investment journey. To start, Greg and Mary
should look to use lenders from the more
conservative end of the spectrum that also
have useful loan features for investors.

This will allow them to maximise their


borrowing capacity later in their investment
journey and grow a larger portfolio than they
otherwise would be able to. The lenders
Greg and Mary should be looking to use
should have features like:

• Access to desktop valuations in order to


easily determine their equity position
over time.

• Easy process to split loans and access to


multiple offset accounts. This will allow
Greg and Mary to keep funds used for
different purposes quarantined in
separate accounts.

• Lenient policies for releasing equity.


Some lenders have very restrictive
cash-out policies which would make
future portfolio growth difficult as any
existing equity will be ‘trapped’. The Greg and Mary look to use up their full
ability to release equity is key. borrowing power with a suitable lender
fitting these criteria. Typically, 1 or 2 of the
• Simple process for extending interest only big 4 banks will be highly suitable. Greg and
terms. The ability to maintain interest only Mary borrow their first $2.2 million of debt to
terms into the future will help manage fund their portfolio from their chosen
Greg and Mary’s financing risk. foundational lender.

33
PHASE 2 – MID-TIER LENDERS

Greg and Mary have now reached their


borrowing limit with foundation lenders.
They no longer pass servicing under the
more conservative calculators to continue
taking on additional debt.

In order to continue borrowing, Greg and


Mary need to go to a more aggressive
lender. However, it’s important they consider
this lender choice carefully, as they need to
map out a path to future portfolio growth.

Borrowing with the most aggressive lender


at this point could be detrimental unless
absolutely necessary, best to save the most
aggressive lenders till the very end when you
really need them.

At this point in their investment journey,


Greg and Mary and looking for a mid-tier
lender that has:

• A more favourable servicing calculator


that will allow them to continue
borrowing and expanding their portfolio. • Features like desktop valuations and
favourable equity release policies are
• Access to interest only terms to help
still preferable, but at this stage it is
them manage their cash flow and
more likely Greg and Mary will be
maximise their future servicing position.
looking at lenders who don’t have
these features.
• Reasonable pricing. As Greg and Mary
move to more aggressive calculators,
they can expect the interest rate offered Greg and Mary borrow their next $1 million
will increase. However, at this stage they from a suitable mid-tier lender, until their
should still be looking to get an interest borrowing power with this lender is
rate that is not too much higher than the exhausted.
foundational lenders they borrowed
with initially.

34
PHASE 3 – AGGRESSIVE LENDERS

Greg and Mary have now reached the point


where they no longer have any remaining
borrowing capacity with mid-tier lenders. To
continue borrowing they now need to use
the most aggressive lenders. They have this
option because they have correctly
structured their loans over time, borrowing
from the right lenders at the right time.

To continue borrowing Greg and Mary will


have quite limited lender options. At this
stage the only real criteria are lender’s
servicing calculators. Greg and Mary will
likely only pass servicing with 1 or 2 lenders
so they will just have to accept the offered
interest rate and other loan features if they
want to continue borrowing. At this point in
their investment journey it is very important
to consider whether each additional
investment will generate the returns
necessary to compensate for the higher
borrowing costs and increased risks at this
highly leveraged stage.

Greg and Mary find the right investments to This is why it’s so important for property
continue growing and can borrow another investors to have an understanding of the
$1.2 million. Greg and Many have now finance game so you can make it work for
reached their maximum borrowing capacity you, rather than getting stuck before you’ve
with $4.4 million in debt. By structuring their achieved your objectives.
lending correctly over their investment
journey they have been able to borrow an At the end of the day, property investing is a
extra $2.2 million than if they went to the little like a business partnership with the
wrong lender at the start and got stuck at the bank, you need their assistance to grow.
conservative lender stage. As you can see Being with the right partner at the right time
the correct financing structure allows you to opens up your possibilities and allows you to
just about double your borrowing capacity. grow a large portfolio.

35
Greg and Mary's borrowing capacity has doubled because
they have carefully structuted their finance
$4.5
$4.0
$3.5
4.4
$3.0
Millions

$2.5 3.2
$2.0
$1.5
2.2
$1.0
$0.5
$0.0
Conservative lenders Mid-tier lenders Aggressive lenders

CONCLUSION
Getting your finance structures correct from the outset can transform your portfolio and you
as an investor from someone who remains stuck at 1-2 investments, to an advanced investor
with a deep and successful portfolio.

36
SHARE THE KNOWLEDGE
If you know someone who is thinking about
applying for finance, whether for their first home
or an experienced investor we suggest passing
this book over to them so that they can read up
on the key steps to how a bank will view their
credit application.

37
WANT TO KNOW MORE?
If this book has helped educate you about to get the best property financing for your
property finance, why not book a no financial future.
obligation 30-minute finance strategy
session with one of Confidence Finance’s Confidence Finance has developed this
expert strategists? 30-minute Finance Strategy Session to help
you achieve your personal and financial
Here, we will help you arrange your new and goals sooner. This session can be
existing loans for long term stability, flexibility conducted with you over the telephone,
and investment success. We will cover how Skype or in-house at our office.

WHAT WE ACCOMPLISH
IN THIS STRATEGY SESSION WITH YOU
• You’ll run through a discovery process to assess your current situation and get greater
clarity over where you’d like to be in the medium to long term and what is possible.

• Based on this information, we’ll let you know what is and isn’t feasible for your portfolio
over the next five years.

• We’ll also provide some immediately actionable tips to help you maximise your
current position.

We wish you all the very best on your journey to creating lasting wealth through
property and making all your dreams come true.

Confidence Finance is one of Australia’s leading voices in educating property investors


about how property finance works. Confidence Finance’s mission is to continuously set the
benchmark for knowledge, expertise and professionalism for the rest of the industry.

38
WHO WE HELP

• First time investors to establish their financial foundations.


• Property owners looking to purchase a home to live in or upgrade their
existing home
• Advanced property investors with more than one property looking to
continue to grow their portfolios

Principals Redom Syed and Curtis Stewart are two of the most educated
and informed finance strategists in the country.

Both learned their trade with the brightest talent in Australia at the
Federal Treasury. Now they use their knowledge and experience in the
finance industry to educate Australians about current market conditions
and strategize with investors to correctly source and secure finance for
the long term. Redom has been recognized as one of the industry’s
brightest young talents.

CONFIDENCE FINANCE AWARDS

39
Visit our Website: www.confidencefinance.com.au

Phone Number: 1300 241 095

info@confidencefinance.com.au

Confidence Finance Pty Ltd.

317/410 Elizabeth Street

Surry Hills, NSW, 2010

www.confidencefinance.com.au

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