3 financial structures that can limit your borrowing capacity
Don’t let your financial structure hold you back from achieving your property goals in 2016 – here are 3 common finance mistakes that can limit an investor’s borrowing capacity.
When seeking to build a sizeable portfolio, many investors focus on the need to find properties that will grow in significant value.
However, investors also need to be aware of their financial structures because the wrong arrangements can severely constrain one’s borrowing capacity, and subsequently their ability to build a large property portfolio.
Here are 3 finance structures that investors should typically avoid.
Cross collateralisation is when a lender uses two or more of your properties as security to issue you a loan. This effectively keeps you tied to the one lender and can reduce your ability to borrow – in some instances, your lender may stop lending to you altogether. It’s best to secure each loan with one property only to maximise your lending capacity.
Some accountants or financial planners may suggest you buy property via a trust. While a trust ownership may help with asset protection, this type of ownership structure can also limit an investor’s borrowing capacity. Some lenders will not allow the negative gearing claims for loan serviceability where the property is owned in a trust. Before establishing a trust to buy an investment property, it’s best to engage the advice of a mortgage broker who specialises in investor loans to assess your borrowing capacity.
Joint and several liability loans
When borrowing jointly with another person, you are each individually responsible for the entire debt but only entitled to half the rental income. This can adversely affect your borrowing capacity outside of the joint purchase, particularly if you’re buying with someone other than your partner.