We’ve had a few clients recently come to see us about borrowing in order to purchase additional property.Borrowing money is predicated on the ability to repay it – this means having a regular income and appropriate cashflow, also known as serviceability. Interestingly, something that has come up, is the notion of having a very solid asset and cash position, but relatively low income by comparison. They are asset rich but lacking in the income department.
What does it mean to be asset rich but income poor?
What we mean by asset rich is when you may own property, hold shares or have a chunk of cash/savings in the bank but not be generating enough income (either as an employee or self-employed) to be able to service the loan you require to purchase property. If you are unsure how to leverage your portfolio to build your income, speak to Andrew our Wealth expert who will be able to guide you in the right direction and check in to make sure you are on the right track.
But if I have lots of assets surely the bank will lend to me?
In the past this was the case but tighter regulations in the past couple of years have meant that you need a good asset base AND strong income to get a loan. Having assets and cash savings is very good but you need to have income in order to borrow and repay a loan. The banks use a range of different measures to determine how much they will lend, some of these include:
- Debt-To-Income ratio: how much debt you have compared to your income,
- Loan-Value-Ratio: how much you are borrowing as a proportion of the property value,
- Serviceability: what you can afford to repay each month and
- Borrowing capacity: how much they are prepared to lend to you based on your income.
While having a strong net asset position will help your overall application strength, it usually won’t increase your borrowing capacity if it isn’t income generating.
How can I improve my income/cashflow position?
There are a few different ways you can improve your income/cashflow position, it’s important to note you should consult with a financial planner or an accountant before making any changes. The information here is general in nature only.
- If you are working part-time or casually, you may consider working full time
- Consider investments that generate income such as funds paying a dividend or bonds/cash products that pay a regular return
- Consider positively gearing investment properties
- If you are self-employed, we’d strongly recommend speaking to you accountant as they may help you distribute your income in a way that is received more positively by lenders
- Alternatively, you could also look to reduce personal debt such as credit cards or car loans as this will reduce your repayments and will increase your cash flow that could be used towards a mortgage
Not sure what you can borrow based on your current income? Get in touch here, we’ll run the numbers and help you identify areas that may be problematic.