Are you a property investor who owns several investment properties?
If so, congratulations! Investment in Australian property has a proven track record of being a highly lucrative venture. But you have to watch out!
A sizeable investment portfolio comes with many risks. Often when investors get to this stage they feel unstoppable! Be aware that you could actually be at your most vulnerable.
The banks see you as a higher risk!
The bigger your portfolio is, the harder it becomes to borrow more. In fact for property investors with several properties, the banks actually have special lending guidelines to make it tougher for you to borrow more!
How much can you borrow?
Understanding your borrowing power is crucial in deciding on your next investment. The problem though is that working it out is not so straight forward.
Generally, what most banks do is “stress test” your portfolio to see if you could cope in the event that interest rates rise. They assess your loans using a higher assessment rate, above the standard variable rate, and with principal and interest repayments.
For you investors with most of your loans on interest only repayments, this could mean losing your next investment property because your borrowing power is just a bit short.
Is there a solution? Yes, choose the right bank! The way that banks calculate how much you can borrow varies quite a lot. For investors with a large portfolio, there are banks which will assess your loans using the actual repayments.
Just by picking the right bank you could easily increase your borrowing power from $300,000 to $400,000!
However, please be aware this does not actually change the risk of your situation. Rates can and will go up one day. We recommend that you play it safe and borrow below the maximum you can actually get.
If you have maxed yourself out then leave funds on stand by and be willing to sell properties quickly if you get into trouble.
Your Loan to Value ratio (LVR)
When you first start to get into the property market, borrowing with as little deposit as possible is ideal. But owning a big portfolio with little equity is a death wish!
What is your LVR?
Your Loan to Value Ratio (LVR) is the percentage of the property value that you are borrowing. This should shrink as your property portfolio grows.
As a rule of thumb, investors should limit themselves to:
- 80% LVR if they owe over $3 million
- 70% LVR if they owe over $5 million
- 60% LVR if they owe over $10 million
However, this is the limit – we recommend the lower the better!
Exposing yourself to the bank
The banks worry about your total exposure with them (or the amount you owe them) and you should as well! This is particularly an issue if you are borrowing over 80% LVR.
The fastest and safest way to grow your portfolio is to spread out your debt. Not only can you borrow more, but you will also be better off if one bank suddenly decides to lift their interest rates above the competition.
If all of your loans are with one lender, remember that you have to call the shots! Do not let them cross securitise your properties, and if you do decide to fix your rate be aware that exiting a fixed rate loan before the term ends can cost an arm and a leg. Make sure that if you need to walk, you can.
Keeping all your eggs in one basket
Owning several units in one complex or a lot of property in one suburb, is what the banks call “concentration risk.” This essentially means “keeping all your eggs in one basket.”
What if something happens to your complex or what if a natural disaster misfortunes your suburb? The banks worry that they will lose their security and you will not be able to pay your loan.
Spread out your properties and you’ll not only keep the bank happy but you will lower your own risk as well!
If more than half your income is in rent received, banks may be hesitant to lend to you. This is especially true if you need that income to show that you can afford your proposed loan.
In particular, if you have commercial property and it becomes vacant you need a Plan B. Banks can choose which of your properties to sell, and it is easier to sell your residential home than a vacant commercial property.
The best insurance of all is to have cash on standby in an offset account.
I’m using my capital gains to make repayments
Don’t do it!
Increasing your loans, releasing the equity and then using this money to make repayments is a big no no!
Properties don’t always go up in value and unless you have a significant amount of equity this is just too risky!
Risk vs. Reward
When first starting out as an investor you may have taken on your fair share of risks, but as you become bigger and reap the rewards you should shift your game plan to the safe one.
A professional property investor is in it for the long term. They manage the risk of their investments rather than ignoring them.
Speak to a broker!
Need help to finance your next investment property? Our brokers help successful property investors to achieve their investment goals.
Call us on 1300 889 743 or enquire online to speak to an experienced mortgage professional.