How can you become a better borrower?
When it comes to residential property investment, it's all about how much you can borrow. Even if you are a fresh-faced new investor, you will quickly find out exactly what kind of difference your borrowing power can make to your portfolio.
This is perhaps why one of the most frequent questions we get is how people can get more capital out of their lenders. To get you started, here is a crash course on making yourself the perfect borrower.
Maintain a good credit record
Let's start with the one that nearly everybody knows about – your credit rating. It's a little like Santa's list of naughty or nice children, where the people who have been good all the year round get a gift in the form of lower interest rates or more flexible lending arrangements. Meanwhile, the folks who have defaulted on previous loans or even just missed a utility payment will end up getting a black mark.
Why do lenders use this? Borrowing money is about risk – the more likely you are to keep making repayments, the less risk the lenders have. So do yourself a favour: if you want to build wealth through residential property investment in the future, ensure that you don't take on commitments that you can't pay.
Lending is about risk – the more likely you are to keep making repayments, the less risk the lenders have.
If you're self-employed, you might have found that many lenders refuse to give you capital because you lack proof of income. It's still all about risk – if you can't prove you have income, how can they expect you to pay your mortgage?
While salaried or waged workers will not have this specific issue, the same theory applies. If you want a better chance of getting more capital, you should have a fair number of financial records. Pay slips, bank balances, even itemised household budgets all tell the lender that you are not a risky bet. Sometimes bureaucracy has benefits!
Boost your deposit
The latest Reserve Bank of New Zealand statistics show that the majority of investors borrow with a loan-to-value ratio of less than or equal to 70 per cent – a much higher deposit than the standard 80 per cent that first home buyers usually look for.
The reason for that is that when you give a larger deposit, you are reducing your risk to the lender: you have already sunk 30 per cent of the value into the property, so you are less likely to default than someone who has only sunk 20 per cent.
Here's to your financial independence!
Authorised Financial Adviser / Investment Property Expert
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