Investor FAQ: What to do when you’re ‘maxed out’ by the bank

According to him, after buying a few properties, which is valued at $2.2 million and has around $1.6 million in debt against it, he was afraid that he may have “maxed out” in terms of his capacity to keep growing his portfolio.  

Is there something an investor can do once the bank says he can’t borrow anymore?

Todd Hunter: Well, it looks as though part of the issue here is he’s talking about his LVR being at 76 per cent, and anything over 80 per cent then incurs mortgage insurance. It doesn’t mention too much about the servicing side of things, whether he can actually physically borrow more money or be able to repay more money, so I’ll assume he’s talking sort of more the LVR side. Couple of options: You can value add onto the portfolio that you already have. I say that in ways of doing some cosmetic renovations to increase the value of the properties, who then will allow you to actually sort of borrow against that.

If they’re already sort of neat and tidy and there’s not much value add to be done, then you do have that option of going into that mortgage insurance territory. If it’s for investment purposes, it can be capitalised and it is a tax deduction, too, but you would want to have your structures done correctly to minimise that mortgage insurance to keep it – to a minimum. Sort of make it worthwhile and the property’s still profitable. There [are] two options there that can be done.

How can you increase your serviceability capacity?

Todd Hunter: If you have some spare money, you could do value add to the property, renovate, and then increase rents is one way, so that it increases your income. The other way is that you really need to be shopping around lender-wise. There is a vast difference now between all of the lenders on the market in who can do what, who will actually allow you. On the same exact figures, one client could actually borrow $100,000 less with one bank from the other bank. I think you’d really need to be searching that mortgage market, seeing who’s offering what. If there is that value add option to renovate to increase rents, then yeah, look at that as well.

What other options are there in terms of serviceability?

Phil Tarrant: If he’s been buying properties in his own name only based on his serviceability, he could potentially join forces. If he has a wife or a partner who can bring them into the serviceability equation ... He can join forces with someone else and co-invest. That can help with serviceability.

Tim Neary: There [are] options to form a company or a trust like that and bring in other partners? Would there be value in that?

Todd Hunter: There is. There [are] more tax issues in buying company structures, though, as well. I’m not a fan of it, personally, outside of the self-managed superfund area. Obviously, with a company, there’s a flat rate of 30 per cent tax on capital gains tax. It’s pretty much the highest that there is. If you start bringing trusts into it, then you have land tax issues, as well, or potential land tax issues. You’d have to be careful a little bit of the person you’re bringing in, too, because when they want to go buy something potentially on their own, the lenders then look at 100 per cent debt against the property that they own half of, only 50 per cent rent. You’ve got to play it fair on both sides.

Any other advice for investors going through the same situation?

Phil Tarrant: If you need more money, mate, go and ask your boss for a pay rise. It’s a way to increase your serviceability. Another thing you can do is just wait. You know, if you wait four or five years, your equity position’s going to be very different as well, and potentially your serviceability will change as well if you can keep rents increasing in line with the market. At the same time, running in conjunction with that, look at how else you can generate more income.

At the end of the day, it is still advisable to seek out the help of your financial planner, accountant, buyer’s agent, mortgage broker, and the rest of your financial team to get the solution tailored specifically for your needs.

Tune in to The Smart Property Investment Show’s Q&A session to find out answers to some of the most frequently asked questions about property investment – from picking an accountant to achieving long-term financial stability on your portfolio.