Aggressive back to back rate rises by the RBA have put a lot of would-be investors in a much different position than they were back in April this year.
While rents have been rising and some property prices have begun to fall, presenting investors with some opportunity to build wealth and bring in strong cashflow, a lot of people are finding they are suddenly able to borrow a lot less money.
To get an idea of this, an average borrower who would have been eligible for a loan of $500,000 in April this year, has seen their capacity fall with every RBA rate hike to now sit at just over $401,000. If the RBA raise by 0.5% in October, that will fall by another $20,000 or so.
That is a huge adjustment to expectations and strategy for anyone to make.
The movements of the RBA and the global problem with inflation are both things that are out of your control. So what can you do about your borrowing power?
Take charge of what you can control
Rates were on the way down for so long that investors may not have been under as much pressure to keep their own financial houses in order. Now, however, it’s more important to find every inch or edge possible to stay in the game.
You need to boost your own borrowing power. In order to do so, you need to take care of a few key areas.
Credit where it’s due
First thing to tackle is credit. Find out what your credit score is before you try to borrow, rather than find out it’s not up to scratch when your lender rejects your application.
You can find out your credit score for free at various online sites, such as moneysmart.gov.au, Equifax.com and a number of others.
If you have a score that needs improving, you can work on doing so before applying for a loan.
The other part of credit is your credit card. If you have a credit card, get rid of it if possible. Lenders don’t look kindly on them and will assume that your credit card is used to its full limit when assessing your application. For example, if you have a credit card with a $10,000 limit, lenders will take $380 per month (3.8% of $10,000 credit limit) as your financial commitment.
If you do have debt on a credit card, or a high interest personal loan, pay it off as a priority.
Amend your spend
First of all, it’s important that you save some money, because lenders will want to see a record of saving a certain amount of your income over a set period of time to make sure you manage your money wisely.
On top of this, a bank will not want to see any frivolous spending. This doesn’t mean to take your kids out of childcare or stop paying your energy bills. Those expenses are regarded as necessary spending. However, a bank may take a dim view of an off the cuff retail shopping spree, or frequent trips to expensive restaurants. And while you may think that’s none of their business, they disagree when considering where to invest their business and yes, they will look that closely at your spending history when assessing you!
If possible, try to boost your income through a side hustle, renting out something that you own or negotiating a pay rise from work.
Get the right financial product
Finally, make sure you are applying for the right loans. You may want to access equity regularly to build a big portfolio, or you may want special features that aren’t available in some loans. Speaking to an expert financial analyst from Zinger would be a good start. An analyst can look at your position and use their expertise to help you hone your strategy and structure your finance in the best way possible to achieve your goals.