Over the past couple of years there have been many changes that have dramatically reduced your borrowing capacity. The Financial Services Royal Commission, government has put pressure on the banks to reduce investment lending and a directive to tighten lending standards just to name a few. If you are unable to borrow then your only alternative is to invest your after-tax income/savings… and that is a much slower path to wealth.
But don’t despair. You can still leverage your assets and income to build wealth. It’s just that some of the rules have changed.
Be more proactive and plan ahead
Gone are the days when clients would buy an investment property on the weekend and ring us on Monday requesting us to organise a new loan. It just too risky to do that these days (then again, arguably, it’s always been too risky). It is important to plan ahead as credit is much tighter these days and credit polices are changing regularly. This will help you project your future borrowing requirements thereby allowing your mortgage broker and you to work out the best time to make any required applications. You must be more strategic.
You must maximise borrowable equity
In a constantly changing credit market it becomes even more critical to maximise your borrowable equity. Borrowable equity is the amount of unused loan facilities that you have access to. Maximising your borrowable equity requires you to proactively increase your credit limits to 80% of your property/s current market value.
The three common benefits of maximising your borrowable equity include:
(1) To fund future investment(s) and/or other uses such as home upgrade, renovation, etc.
(2) To maximise your loan buffers in case of any unforeseen changes or expenses – the more access to credit you have, the lower your overall risk as you have adequate financial resources to weather most storms.
(3) In case your borrowing capacity changes in the future e.g. start a family and go down to one income, change employment, move overseas, property values decrease, credit policy changes, etc. We never know what is around the corner.
Watch this 5 minute video that I recorded last year to learn more.
Start early and don’t waste time
Building wealth is more of a marathon than it is a sprint. Becoming financially independent takes time. And in an environment where money is more difficult to borrow, it becomes more difficult to be able to “catch up” i.e. if you are starting your wealth journey a little later in life. Therefore, do your best to avoid procrastinating. The best time to start investing was yesterday. The second-best time is today.
There are usually three ‘windows of opportunity’ in most people’s lives when building wealth is the easiest:
- When your career is established but before you start a family – as this is typically when you have a high surplus income;
- When your kids are in primary school but before they get to secondary school – as most parents will be able to return to work in some form (so income is higher) and your expenses will normalise e.g. no more child care, etc. If you plan to send your kids to private secondary school, then you need to start investing before those higher costs materialise; and
- When the kids are close to finishing secondary school, especially if they are in private schools as your education expenses will dramatically reduce and you can divert that cash flow into investments.
If you are in one of these ‘windows’, it might be prudent to make the most of it before the window closes.
More now than ever, its quality, not quantity that will ensure your success
If we agree that everyone’s borrowing capacity has reduced by 20% to 50% over the past year (it has), then we must acknowledge that our capacity to invest has also reduced accordingly. This means that there is less room for error. That is, all investments must perform.
Simple logic and sound investment fundamentals command that the quality of the assets we invest in will dictate the returns. If we want above-average returns, we must invest in above-average assets. Therefore, I suggest that you should have even greater focus on ensuring your existing assets are working hard for you:
- all property investments are investment-grade assets and have a high probability of working;
- if investing in the share market, ensure you employ a low-cost, indexed (rules and evidenced based) approach – not trying to pick stocks or actively managed funds; and
- ensure your super is in a low-cost environment.
Work with an integrated team
Ok, so, I admit that I have a vested interest in making this next comment; an integrated team works best. That is, a team that can provide impartial financial, tax and credit advice – because all these things are important to consider when formulating advice.
I have a vested interest in saying this because that’s exactly what we do at ProSolution. But I have built my business in this way because I know that it’s in the best interest of our clients. That is, we can offer holistic advice and not leave any stone unturned.
