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How To Get Finance

There are three key things investors should know about getting more money from their bank right now, writes Andrew Nicol.

By: Andrew Nicol

1 June 2020

The number one thing 40.9% of investors say is holding them back from growing their investment portfolio is getting money from the bank.

So how do you get more lending to grow your portfolio if the bank has already turned you down?

There are two parts: equity and serviceability (income). Today we’ll cover the income side.

Here’s the thing: sometimes, it’s not about how much debt you have, but rather how it’s structured. Why? Because the bank doesn’t base new lending on your actual income or expenses, but rather your unencumbered income you have under a series of stress-tested conditions.

That’s because they want to see that you would still have enough income to put towards your new mortgage if worst came to worst.

Here are three tactics you can use to increase your unencumbered income, simply by restructuring your debt rather than repaying it.

1. Decrease Your Credit Card Limit

When you apply for a mortgage, the bank tests your credit cards as if you have maxed them out and are making minimum repayments.

Let’s say you have a credit card with a $30,000 limit with TSB or Kiwibank, where the minimum repayment is 5% a month. That’s $1,500 a month of expenses the bank is factoring against your ability to service further mortgages even if this expense doesn’t actually exist. Solution? Decrease your credit card limit or cancel it all together.

2. Extend The Term Of Your Home Loan

Let’s say that you have a $500,000 mortgage on a 15 year term. Most banks stress-test that lending using a 7% interest rate to make sure that you could still afford the mortgage if interest rates spiked.

That means the banks are calculating your current mortgage payments as $4,494 a month. That’s even though you’re only paying $3,453 a month on a 3% interest rate ($1,041 less).

Solution? Extend the term of your loan to 30 years, which drops your minimum monthly repayments to $3,327.

Now, in actual fact, you would likely continue to pay down your mortgage at the same pace. However, you would structure it using a revolving credit. That means that the extra amount you’re paying above the minimum is still considered unencumbered because you could stop making the additional payments and use the cash elsewhere if worst came to worst.

3. Consolidate Hire Purchase Debt Into Home Loan

Finally, let’s say you have a $16,000 hire purchase due to the fact that you bought a very nice lounge suite a few years ago. You’re paying that over five years at 0% interest. That means you’re spending $267 a month paying this down.

If you consolidated this into your mortgage over a 30 year term, then the banks would calculate this at $106 a month using the 7% interest rate.

That might sound scary, paying off a $16,000 lounge suite over 30 years. But, remember you would likely only structure the payments this way to unencumber your income so you can pass the bank’s calculations. You’d actually pay it off the same way you are now.

Next Steps

Using these three strategies you’ve found $2,773 worth of additional unencumbered income.

That’s enough income to service $416,800 worth of lending even before we add in the tenant’s rent.

We didn’t pay off debt. We didn’t start saving more. We didn’t get a pay rise.

Instead, we restructured your debts so if worst came to worst, you’d be able to redirect your current repayments towards the new lending.

These are just some of the tactics you can use to get more money from the bank.

If you’d like more, we recently recorded a webinar that walked through how to get both more equity and more servicing ability through the bank, which you can watch for free here: – https://www.opespartners.co.nz... previous-webinars

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