Diversified Lending Structure
It may be well known by a lot of forum members – but the average investor is not aware that they can potentially increase their long term borrowing capacity by over 100% by utilising a diversified lending structure. This is a common discussion I have with first time investors, which isn’t talked about in mainstream media and leaves many ‘direct to branch’ investors with portfolios which are limited by poor structuring from day 1.
It’s quite simple in understanding – but requiring finesse on the part of your broker to achieve. By carefully considering your long term investment plan, lender selection can be used to play lending policy against the various lenders, to maximise the borrowing potential far beyond what any one lender would allow. This isn’t just a case of just using multiple lenders, but using the right lenders at the exact right time. Through doing this you can grow you capacity by 1.9-2.5x what you would achieve with any one lender. Here’s how it works:
Scenario: Family with two children, existing home with mortgage
This scenario is stripped down to the basics – it will not comment on deposit releases, product types etc. This is purely a borrowing capacity experiment which will highlight the difference between using any one lender vs using a strategic mix of lenders to your benefit. The parameters:
*Couple, with one partner working fulltime at $75,000, other part time at $40,000 per annum.
*An existing mortgage for their residence of $400,000, principal and interest payments, 4.5% interest rate
*Credit Card of $6,000
*No other debts.
*Living expenses of $2,500 per month (as this is below the average lender estimate the lender will adopt their higher figure for a couple with two dependent children)
*Purchases are assumed at a 5% yield, 400k or less purchase price (400k is used unless the lender has insufficient borrowing capacity, in which case the lesser figure is used)
Here’s how that scenario plays out across a sample of some of the largest lenders in the market commonly used by investors:
As you will see, most of the lenders are within 5-10% of each other in terms of borrowing capacity – within exception to Lender B which is significantly lower than all other lenders. A lot of the general public do not realise this variance exists between lenders and their policy, which in turn affects investors ability to grow their portfolios.
By using a single lender, should the borrower pick the highest of lenders available by a stroke of luck – they could purchase a single $400,000 investment property, and still have a remaining borrowing capacity of $174,000 before their borrowing capacity is exhausted. (lender C)
As an alternative, through ordering the use of lenders – the same couple can use multiple lenders to extend their capacity far beyond any one lender’s capacity. Here is an example of the same couple, using strategic lending to grow their capacity further:
*Receives the primary residence’s loan of $400,000
*Purchase of investment property, $400,000 debt
*Purchase of investment property with debt at $325,000
*Purchase of investment property with debt at $450,000
Total investment lending: $1,175,000
Total Increase from ‘single lender’ scenario: 104.52% increase in capacity
This is a simplified example, when in reality a good investment focused broker will also weigh up interest only policy, cash out policy, cost effectiveness amongst other many other factors dependent on the individual borrowers scenario and needs – but the fundamental principle remains that through using the right lenders at the right stage of your portfolio growth, you can maximise your potential to borrow.
What Does This Mean For Me?
Through a strategic lending structure you can significantly increase your borrowing capacity than being reliant on any one specific lender. This involves careful long term planning – focusing on lenders which provide the best short, medium and long term outcomes, not RATE.
There are also ancillary benefits from structuring in this manner, including the non-centralisation of debt reducing your risk from any one lender restricting your ability to access equity or borrow further.
When investing, I would argue there are three main phases: Growth (buying properties), Consolidation (peak of investing, reviewing the portfolio and how to retire from there) and Retirement (peak realisation of investment, living off rent, selling properties etc).
Whilst growing the portfolio this diversified structure will allow investors to significantly increase their borrowing potential – whilst sometimes not at the most competitive rate. This justified during the growth period as the benefits of growing the portfolio.
When you do get to a peak size of your portfolio the ‘consolidation phase’ of your portfolio can commence, where by the entirety of the debt can be considered holistically as to whether there is any capacity to restructure debt for cost savings, increasing the portfolio cash flow position. This may allow debt reduction to accelerate or bring forward a position where you can retire from rent – in any case mitigating costs at this point is a prudent measure. It’s important to only do this once the likelihood of wanting to continue expanding your portfolio is unlikely, as a restructure of debts for cost saving may unravel the ability to continue investing through equity releases etc.Borat5000Participant@jgeorgiouJoin Date: 2015Post Count: 3
So why is your borrowing power not affected by your other home loans with the other lenders? I understand it will be affected by some extent, but choosing your lenders obviously lets you advance further, but why?Richard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,024
Your BC is affected by your other home loan repayments however each lender assesses this repayment at a different rate.
Some will take the payment as the actual repayment others apply a percentage margin to the rate (i.e 4.5% x 30% and adopt this) and other work off a pre-set figure say 7.25% for everything.
I have written a number of articles on the subject over the last 15 years for API and we include a PDF on our website on how to Turbo charge your portfolio. It explains the varies stages and mirrors how i built portfolio to over 25M in a decade using a variety of positive cash flow strategies.
Yours in Finance.
Richard Taylor | Australia's leading private lender
So why is your borrowing power not affected by your other home loans with the other lenders? I understand it will be affected by some extent, but choosing your lenders obviously lets you advance further, but why?
Good question – it all comes down to how each lender looks at their own debt and debt of other lenders.
Every lender when calculating your borrowing capacity will stress test the amount of funds you’re borrowing, by calculating the borrowings at a higher rate, and generally at principal and interest repayments. So as an example, a 300k mortgage, interest only at 4.5% may only have a monthly repayment of $1,125. Stress tested, a lender would potentially look at the loan at 7.25%, principal and interest at 25 years (they remove 5 years to factor in the interest only period eating into the repayment term) – equating to $1,667 per month.
Where the lenders diverge in borrowing capacities is through the assessment of other lenders debt. Some lenders will calculate it as above through a rigourous stress test, others may only increase the repayment by 20-30%. There is even some lenders who will take the repayment at it’s actual amount. These more generous calculations allows investors with multiple properties to not be as lumbered down by heavily stress tested debt calculations layering on top of each other. By using these policies against each other, a good structured lending strategy will allow an investor to extend their borrowing capacity far beyond how each of the lenders would otherwise allow.fxdaemonParticipant@fxdaemonJoin Date: 2013Post Count: 114
Thanks for the great article and explanation of the borrowing strategy. Can you please shed some lights on the following 2 questions:
1. Do this statement “to maximise the borrowing potential far beyond what any one lender would allow” risk putting the borrower in
an over leveraged position? Does the lending (or should I say borrowing from my perspective) structure and different lender’s
stress test calculation pretty much takes care of that already?
2. Is this lending (borrowing ;-)) structure best implemented with multiple borrowing entities instead of in the same individual names as
per your example? Other than the often talked about land tax & asset protection advantages, is there any specific reason why this
lending/borrowing structure should be done one way or another?
All lending is stress tested, even if using a multi-lender structure. What it does however is reduce any additional layers of stress testing which can make a portfolio which is substantially cash flow positive, appear heavily negative. Standard stress testing under this kind of portfolio will see debt costs tested 25-30% higher than the actual cost and rental return only 80% of received, whereas a single lender focus could be as bad as debt costs tested at 110% of actual cost and 80% of rental return.
This isn’t about creating an environment of irresponsible lending, but identifying that most banks policies are designed with the mum and dad PPOR owner, not the multi property investor – so when you add multiple properties into the mix an otherwise rational borrowing policy can fly off into absurdity.
As per borrowing structures – for the most part having it in multiple entities will not improve the capacity position if declared correctly as per lender requirements, and in many cases using trusts will have a minor reduction in capacity with some lenders. There is a lender or two which has a technical niche which can be exploited to increase borrowing capacity, but this is a fringe scenario which isn’t relevent to 95% of the population looking to invest compared to normal investment.