A lot of investors assume the next property should be easier to buy.
You already own property, you have rent coming in and you may have built up more equity since the last purchase.
But from a lending point of view, the next property can actually be harder.
The main reason is that the bank is often looking at a very different set of numbers to the ones you see in your own household cash flow.
The Rent You Receive Is Not Necessarily the Rent the Bank Uses
Say an investment property is receiving $800 a week in rent.
You might compare that to the actual loan repayment and feel the property is carrying itself reasonably well.
The lender does not usually assess it that way.
Rental income is generally shaded, which means only part of the rent is used for servicing. At the same time, the lender normally assesses the existing loan at an interest rate above the rate you are actually paying.
So the income side is being reduced while the repayment side is being increased.
That is why a property that feels fairly comfortable from a real cash-flow perspective can look much tighter inside a lender’s servicing calculator.
Once you have a few investment properties, that effect starts to compound.
Interest-Only Repayments Can Actually Reduce Borrowing Capacity
This is one that catches a lot of investors out.
Because interest-only repayments are lower each month, it is easy to assume they should improve borrowing capacity.
In many cases, the opposite happens.
If you have a 30-year loan with a five-year interest-only period, the lender may assess the principal as though it needs to be repaid over the remaining 25 years.
That creates a higher assessed repayment than if the same loan were being assessed over a full 30-year principal and interest term.
So while the actual monthly repayment may be lower during the interest-only period, the servicing impact can be worse.
This is one of the reasons someone can have decent investment cash flow but still find their borrowing capacity has tightened.
The Bank May See Your Portfolio Very Differently
You may look at your portfolio and see strong rent, manageable repayments and plenty of equity.
The lender may be looking at shaded rental income, higher assessment rates and shorter remaining terms on interest-only debt.
The difference is important because borrowing capacity is based on the lender’s servicing calculation, not your actual monthly cash flow.
That is why I think the numbers need to be run properly before making plans around the next property.
The Lender That Worked for Property One May Not Work for Property Three
A lender may have been a great fit when you bought your first investment property.
A few years later, the position may look very different.
You might now have a home loan, multiple investment loans, equity debt and a much larger overall portfolio.
At that point, another lender may assess rental income differently, take a different view of existing debts or have a better policy for the way your income is structured.
That does not mean one lender is better than another overall.
It means the lender that suited the first purchase may not be the best fit for the next one.
Smaller Debts Can Start to Matter More
It is not always the investment loans causing the whole issue.
Credit card limits, car finance and other debts can start to have more impact as the portfolio grows.
A credit card can affect servicing even if there is very little owing, because lenders generally look at the limit rather than just the current balance.
Car loans can also take up more borrowing capacity than people expect.
Individually, these commitments may not appear significant, but once they sit alongside a large home loan and multiple investment loans, they can start to make a noticeable difference.
Equity Does Not Fix a Servicing Problem
This is another common misconception.
You might have hundreds of thousands of dollars in usable equity across your properties, but that does not automatically improve your borrowing capacity.
Equity can help with the deposit and purchase costs.
The lender still needs to be satisfied that your income and rental income can support the total debt.
That is how investors can end up asset-rich, with substantial equity, but still unable to borrow the amount they expected.
The issue is usually not the security available. It is the servicing.
Refinancing Can Help, but It Needs to Achieve Something
Investors often ask whether refinancing their existing loans will improve borrowing capacity.
Sometimes it can.
Another lender may assess the total position more favourably, or there may be an opportunity to improve the way the existing lending is structured.
But I would not refinance several loans just for the sake of moving them.
The question is what the refinance actually improves.
If it provides materially better borrowing capacity, improves the structure, reduces repayments or puts the client with a lender that better suits the next purchase, there may be a reason to proceed.
If it achieves very little, there may be no reason to move anything.
Look at the Whole Portfolio Before Buying Again
Once someone owns more than one property, I think it is worth stepping back and looking at everything together.
That means the home loan, each investment loan, rental income, interest-only periods, credit limits, available equity and the likely next purchase.
Only then can you properly compare how different lenders assess the same position.
That is usually where the real differences start to show.
It also avoids making the next loan work in isolation without considering what it does to the rest of the portfolio.
The Highest Borrowing Capacity Is Not Always the Right Answer
There can be value in finding a lender that provides a stronger servicing result, but I do not think the goal should always be to squeeze out the absolute maximum borrowing capacity.
There still needs to be enough room in the household cash flow for rates moving, repairs, vacancies and the normal costs that come with owning property.
The lending has to work outside the servicing calculator as well.
For me, the better question is not only what will the bank lend? It is also what amount of debt are you actually comfortable carrying?
Thinking About Your Next Investment Property?
If you already own one or more investment properties and are trying to work out what you may be able to borrow next, it is worth reviewing the portfolio as a whole rather than looking only at the proposed new loan.
If you want me to look over the existing loans, rental income, interest-only periods and borrowing position, get in touch and we can work through what the realistic options look like.
