How do my existing investments affect my borrowing capacity for my next investments?
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When planning your next investment, understanding how your current investments impact your borrowing capacity is essential. Lenders assess your financial position holistically, taking into account your existing investment portfolio before approving additional loans. This article explores the key ways your existing investments influence your borrowing power and what you can do to maximise your capacity.
Existing loan commitments
If you have outstanding loans for current investments, lenders will factor these into your debt-to-income ratio (DTI). This ratio compares your total monthly debt repayments to your gross monthly income. The higher your DTI, the lower your borrowing capacity, as lenders may view you as a higher-risk borrower.
What you can do:
- Consider refinancing existing loans to secure lower interest rates.
- Pay down smaller debts to improve your DTI.
Rental income
Rental income from investment properties can boost your borrowing capacity. Most lenders consider a percentage of your rental income (typically 70-80%) as part of your income assessment. However, they also deduct ongoing expenses like property management fees, maintenance costs, and vacancy periods.
What you can do:
- Provide detailed records of consistent rental income.
- Highlight long-term rental agreements or low vacancy rates.
Investment portfolio (shares, managed funds, and savings)
Non-property investments, such as shares, managed funds, and savings accounts, contribute to your overall financial position. Lenders view these assets as liquid resources that can improve your capacity to service loans. However, they may only count a portion of your investment portfolio’s value.
What you can do:
- Maintain a diversified portfolio to demonstrate financial stability.
- Avoid excessive withdrawals that could deplete your savings.
Credit history
Your credit history, including how you manage existing loans and investments, significantly affects your borrowing capacity. Late payments or defaults on current investments can reduce your creditworthiness and limit future borrowing options.
What you can do:
- Always make loan repayments on time.
- Regularly review your credit report and correct any errors.
Equity in existing properties
Equity is the difference between your property's market value and the outstanding loan balance. Lenders may allow you to access this equity to fund your next investment. Higher equity levels increase your borrowing capacity by providing security for additional loans.
What you can do:
- Get a property valuation to confirm your current equity position.
- Consider using a line of credit or equity loan to finance new investments.
Investment type and risk profile
The type of investments you hold can affect how lenders assess your borrowing capacity. Riskier investments, such as high-volatility shares or off-the-plan properties, may be viewed less favourably than low-risk investments like blue-chip shares or established residential properties.
What you can do:
- Balance your portfolio with both high and low-risk investments.
- Provide supporting documents to demonstrate the profitability of higher-risk investments.
Your existing investments play a crucial role in determining your borrowing capacity for future ventures. By understanding how lenders assess your financial position and taking proactive steps to improve your standing, you can maximise your borrowing potential and make informed investment decisions. Whether you're leveraging equity, optimising your debt-to-income ratio, or strengthening your investment portfolio, strategic planning is key to unlocking new opportunities.
