When I see mortgage broking clients, many typically have one of three common problems:
a very strong income and a small capital base to work from; lots of equity with low income constraints or simply, a lower income with a dream to begin to build their wealth and unable to obtain the funds needed.
The latter is becoming a narrative that is all too common in the lending market at present.
Shrinking Borrowing Power
I understand servicing capacity very intimately – 6 months ago when obtaining pre-approval for my own loan the bank was much more generous and flexible though now I am experiencing firsthand that, perhaps, I don’t have as much money to spend as I first thought…
Over the week end I read an excellent article about “Rentvesting”: an investment strategy where an investment property is purchased, and the owner continues to live in rented accommodation.
This is a sound strategy if you are low on servicing income. Buying the home as a rental property and getting a tenant the bank gives you a free kick by adding the rental income thus boosting your available funds.
Rentvesting Case Study
Claudia earns $100,000 per year as an up-and-coming Analyst at a bulge bracket investment bank.
After saving a considerable amount of money she would like to purchase a property in Bondi, Sydney. Claudia found her dream apartment though with the tight lending standards at present, the loan did not service on her (very) high income.
I suggested Claudia look at making the purchase an investment, become a landlord, continue to live in her rental property and move into the apartment when she is on a higher salary.
Now the bank will look at two buckets of funds for borrowing: Claudia’s salary plus rental income, and we have grown her assessable income from $100k to $145k per year. Negative gearing also provides a little boost too…
Rentvesting + Brovesting + Girlvesting…
The article also raised another common theme that I am seeing clients pursue – buying property with friends and family.
Many see this as a panacea to enter the property market: buy a property with a friend, get onto the property ladder and move onto the next property.
Did you know that on any subsequent purchase even though you may have 50% of the debt, most banks will assess you on 100% of the liability?
I’ve had clients purchase with friends and have tried to buy a property with their partner and being locked out due to servicing constraints. There could be capital gains tax implications and suggest speaking with your accountant to work out an optimal strategy.
Rentvesting + Brovesting + Girlvesting certainly widens options on offer.
Assuming you are assessed on your smaller portion of debt, you require a smaller deposit as you are buying with family or friends.
Rather than getting a loan for $750k, buying a home with others could see your share of the debt at only $375k. There are very few areas in Sydney that you can buy a home for $375k.
Thankfully, there are some lenders that will assess your loan on your portion of your debt only, and I encourage you to give me a call to explain how this works…
If you have a dream or desire to buy a home, the two strategies above provide a short example of how this may work. I hope the summary has provided you with a little hope you go out and purchase a property.
- Rentvesting possibly allows you to boost your borrowing power by adding your salary plus rental income to enable you to afford a property that is out of research; and
- Buying with friends and family is a great way to get onto the property ladder. Be aware, though, that this may negatively impact your borrowing power for any future purchases down the track if the loan is not structured effectively or lender has complex metrics to assess your debt.