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Building a property portfolio is a dream harboured by many. But how do you go about financing it?

Save, slog and budget – that’s the natural advice anyone would give you. But what if we told you that the most successful property portfolios are built on others’ money! Well, we are not talking about parental guarantee loans or FHOG, without which many home buyers find it difficult to buy their first home. We are talking about your lender – the banks – whose job is to lend you money for a small guaranteed amount, determined by the rate of interest.

 
Mortgage  Property investors
 

So, here is an investing secret that all successful investors swear by – you must borrow the maximum amount you can to invest in a property. Yes, how you finance your property is as important as choosing the right property. So, get your finances right with these financing tips to start building your property portfolio.


1.Maximise your borrowing capacity

Your capacity to borrow depends largely on two factors – your ability to service the loan and your equity. Naturally, by improving both these aspects, you would improve your borrowing capacity.

Here are some easy ways to increase your loan serviceability:

  • Boost your income by taking up a part-time job or ask your boss for that pay hike that has been long due.
  • You can earn more rental on your existing investment properties in case you have been charging below the market price.
  • Reduce your debts by closing any credit cards that you are not using. This drastically improves your debt-to-income ratio.
  • You can refinance to a lower interest rate if you find yourself paying extra to a bank out of sheer laziness. It is recommended to do a health check up on your home loan every two to three years. Learn more here.
  • Consolidate all your high-interest rate debt into your home loan for a lower, single repayment each month. Read more about debt consolidation here.


2. Improve your equity

To improve your equity, you must reduce your liabilities and increase your assets. To achieve this, it is imperative to pay down existing debt, reducing the amount of debt on your books. Besides, you must make a good budget and maximise your savings. This will help you make additional repayments, building equity in your property at a faster rate.

Experts also suggest that when you are investing, you must borrow the maximum amount you can, putting up the least possible amount from your end, for better ROI.

For example, if Zoey has $200,000 saved up for a property worth $500,000, she can opt for a 60 percent LVR loan to fund her purchase. However, as an investor, if she only puts up $50,000 as a deposit, taking a high LVR loan with a small LMI payment, not only does she stand to gain better ROI but can also secure another property with the remaining savings in her kitty.

We suggest that you speak to your accountant and mortgage broker before taking a decision.


3. Structure your Loan Right

A well-structured loan could save you tons of money over the years as it gives you financial flexibility and reduces your risk profile. Many investors opt for interest-only loans to manage their finances. In general, you must structure your loan in line with your investment goals to get the maximum benefit. Read more here.


4. Don’t Cross-Collateralise your Portfolio

Cross-collateralisation means using more than one property to secure a mortgage (or more than one mortgage). Having all your mortgages with one lender gives the bank greater control over your financial affairs and exposes you to unnecessary risk that can be avoided by taking a standalone loan.

Keeping separate securities for individual home loans is one of the best pieces of advice any astute investor will give you. Indeed, it might be convenient to cross-collateralise or have all your loans with one lender, but you’d rather avoid doing so. Read more to know why.


5.Shop around for lenders

Very often, people develop a sense of comfort or loyalty to a bank and continue using the same lender to borrow money for all their transactions. However, this loyalty can cost you in more ways than one. Not only does it limit the amount you can borrow, but it also increases your risk as the lender gets access to your entire property portfolio. Savvy investors choose to shop around for lenders – enabling them to borrow more and exert better control over their assets.
Having a trusted mortgage broker by your side could make your investment journey much more fruitful. Brokers do not work for any single bank. They have access to financial products from several banks and can use their years of experience to help you strategize your investments better. A good broker will not only introduce you to competitive home loan options but also help you structure your loan properly, making your investment journey much smoother. Get in touch with a broker to know more.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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