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It may challenge your belief system to know that we have a goal of accumulating high levels of debt with the desire to have that debt secured by appreciating assets like property.

We believe the major benefit of investing in property is the ability to acquire finance and this finance is the reason why we invest in residential property. It is not the property acquisition or selection that will make the money, it is the structure of the deal, the leverage and the financing.

Therefore, your borrowing capacity is the crucial element in determining whether you can keep borrowing to expand your property portfolio.

In deciding your borrowing limit, lenders will use what is called the DSR (Debt Service Ratio). The DSR is the ratio of loan repayments to your gross income. In general, for your debt serviceability calculation the banks consider 30 to 40% of your personal income and up to 80% of your rental income.

DSR

Here are some other factors that Lenders take into consideration when determining your borrowing capacity, but it is the final DSR which will usually override the less important factors:

Net income

How much do you clear?

Will you have one salary or two?

Do you have other sources of income?

 

Stability of income

Are you in full-time work?

How long have you been with your employer?

Are you self-employed?

 

Other loan repayments

Do you have a car loan? HECS debt? Credit card, Store card or any other debt?

 

Total credit card limit

A high limit can decrease your borrowing capacity.  A Bank will ALLWAYS deem the full limit to be drawn.  This put’s a real dint into your borrowing capacity…

 

Credit history

A bad history of paying back credit will severely restrict your capacity to obtain finance.  This can be as small as a $50 telephone bill that is outstanding (even though you are claiming it’s in dispute…)

A bad credit history won’t help – but you must always be honest – don’t think no one will know, in today’s cross linking of information you will be found out and nothing will put the brakes on more than a non- or incorrect disclosure…

 

Number of dependants

Do you have children?

 

Term of the loan

Are you taking out a 5, 10, 15 or 30-year loan?

 

The Interest Rate

When rates are higher, your borrowing capacity will be lower

 

Property Friends is a specialist Property Investment Advocacy that has been operating for the last 13 years on the basis of 3 principles: Trust, Community & Progress. www.propertyfriends.com.au (03) 9758 5331

Image design by: Freepik

Uwe Jacobs Property Strategist

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