How to get investment ready sooner

Foreign Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money Podcast. I am Jessie Edge. G', day, Scott Parry. How are you?

Very well, thank you, Jerry. Very well. Pretty excited to run through today's topic with our listeners out there. It's something where I'm sure everyone's had it on their mind at some point, and we're just going to sort of just give you some perspective on how we see it, how other institutions see it, just so you've got that visibility of go, what do I actually need to be able to tick the boxes? So what are we talking about?

So we're talking about, okay, if you want to buy an investment property, which so many Australians do, but you can't service it, so service it means you can't technically afford it in the eyes of the bank, then what can you do to improve your serviceability and to be ready to buy sooner?

Great. So our superpower at Crown Money is helping people create serviceability or borrowing capacity 200% faster than the average Australian. What does that mean? That if you can't afford to buy an investment product today, but want to, we can help get you from where you are today, today to being ready and investment fit, I call it 200% faster than what you're currently doing. And we're going to go through how we do that. That's what this topic is about. So when banks look at your income, they will lend you around about five times your gross salary. Super rule of thumb, very general. Obviously a lot of other factors come into it, kids, etc. But let's just say rule of thumb, if you earn 100 grand a year, the banks will lend you 500 grand. Okay? So when you hit your ceiling, your borrowing capacity ceiling, most people have got a home loan and then the banks won't lend them enough to buy another property. Obviously, they take the rental income into account times five. And so what we need to do is how do we actually increase your borrowing capacity? And so there's a few ways. The number one fastest way to increase your borrowing capacity is to accelerate the debt reduction on your own home, pay your house off faster, create more equity. Why does that help with your borrowing capacity? Because the lower your bad debt, your home loan debt is, the more you can borrow. And so for us, the quicker we pay your house down, the quicker you are able to afford investment because you've got less home loan debt or bad debt, which is not tax deductible. And so remember, you borrow five times, you grow salary. If you pay your house down from 500 down to 400, then you freed up another 100 plus thousand dollars in borrowing capacity for that investment property. So that's the first way pay the bad debt off as fast as possible.

And actually I was just going to jump in and add there that it's not actually dollar for dollar because the bad debt is just an entire debt. Whereas in a servicing calculator good debt is tax deductible. So you actually get a little bit more of that good debt that you then you would have for that bad debt.

Exactly, yeah. So you got depreciation, deductible interest, etc. Which you can claim. So the second way is to have zero credit cards.

Yeah. No other debts.

No other debts. So you're like oh, but I don't pay any interest on my credit card. I pay it off every single month. It's irrelevant. The banks don't care, we don't care. And so what happens here is if you got a $10,000 credit card limit, you could borrow 30 to 40 grand less just because that 10 grand credit card limit even though you owe $0 on it. So we always said to clients, pay off and close all credit cards. You don't need credit cards. I know you and your points are getting all excited but there's bank, we've got a platinum debit card right now. It gives you Visa. Sorry, Platinum debit card gives you Quantus frequent fly points for all your spending on your debit card. Yeah, you're spending your own cash, you're getting frequent flyers, you're getting frequent flies for any cash sitting in your account. So that's what I use personally as the bank west platinum debit card. I'm not telling you to do that, I'm just saying that's just something to negate your points argument about your credit card debt.

Yeah, all other debts are bad for sure. Personal loans, car loans, buy now, pay laters. A lot of people don't realize that buy now pay laters massively affect your servicing. They're treated like a credit card. So that's after pay and zip pay and that. So you've got to get those things out of your life and consolidated away, pay it off and then that eases serviceability significantly.

Another point which increases serviceability, get rid of the novated fleece. Everyone has heard about salary packaging for a car, taking pre tax income to buy, liability dumb. Even though it's been sold to you on a tax Action. Anything in life that sold you on a tax deduction is dumb. It means you're losing money. And so if you're taking pre tax money, putting into a liability, when you can take pre tax money and put it into an asset, why would you ever do that? And so getting rid of the novated fleece out of your pay, that enhances your borrowing capacity a huge amount.

How do you get rid of a novated fleece?

You pay it out or you sell the car.

Yeah. What are your thoughts on consolidating it into the home loan?

Yep, that's paying it out. Yeah, for sure. If you really like the car, obviously, I mean I'd like you to sell the car, pay it out and then just buy a cheaper car for like 15, 20 grand and just bury your ego for a few years and be humble and creates stacks of savings. Get an investment property with all the savings.

I love the exercise of saying how much is your car loan costing you on your novated fleece? How much? And you say this is how many investment properties you could afford with that money. And usually it's like two or three because the difference between what you pay. It's crazy.

Yeah, it is just dumb. Taking on debt to buy a car, that's normal. Right. Everyone thinks course that's what you're doing. Everyone's doing it. So the other factor which we found to be really powerful and you wouldn't have heard many people doing this, what we really sort of focused on is A, how do we reduce our expenses, how do we pay down debt, But B, how do we increase our income? And I don't think enough time, effort or energy goes into this. It's one of the quickest wins we get for our clients. Where we actually do. It's called salary coaching. How we coach you to get a pay rise. What you need to say what in order you need to say like a full game plan, a full playbook. On this day, do this, on that day, do that. And so we sort of map out, hold our clients hands and say this is how we're going to get your pay rise. Obviously if you're working in a government job, it's very difficult to get. I'm talking about those people who are employed in the private sector.

Yeah.

And so we just basically hold your hand, guide you every step of the way, tell you what part we need to do in what order to give you the best chance of getting that pay rise. And like if you get a $5,000 pay rise, you just increase your borrowing capacity. By 25 grand.

Yeah.

Like, it's just that one simple, clean request.

More with an investment property. And so, yeah, the service bill is.

Even higher and it helps you pay your house off even faster. Like it's. It's a total win, win, win. It's so much easier for people to get a $5,000 a year pay rise and is to save $5,000 in their bills. Like, it's just not that much wiggle room. It'd be gas, your electricity, et cetera. So, yes, getting a. I know it sounds easy, but most females don't ask. That's what I've found is it's really interesting that the females are the hesitant ones to ask for whatever reason. I'm sure there's lots and lots of reasons, but it's just something where they seem to be really hesitant about asking for a pay rise, which is just fascinating. Just from the numbers that we've seen over the years, that the female is a bit more reluctant than the males to say to their boss to pony up.

Yeah, yeah. How fascinating. But that. Yeah, salary. And a lot of people kind of are a little bit scared to ask for a pay rise or is it.

The fear of getting sacked or.

Yeah, they're losing their job, I think. But it's about understanding the process and there is a process to it. There is a right way to do it and there's absolutely a wrong way to do it as well.

We have the playbook.

Yeah, that's what we did.

Yeah. We'll do everything to make sure it's seen in a really positive light. It's not going to come across like pay me or else I leave. It's. Yeah, we just do it in a smart, delicate way where the boss is saying, yeah, no problems. And if it's a no now, what do I need to do to make it a yes?

I hear yes. Yeah.

And that's very important information.

Yeah, that's great.

So, yeah.

So those are all the points for serviceability. Y. Did you have anything to add to that one?

Yeah, there was probably just one more there, which. That's something. The number of kids you've got. You can't delete kids. I'm sure many of us wish at some stage we could just for a night or two. But what happens is the banks don't see any child under the age of 18 as a dependent, which is pretty crazy because I think we all know they're expensive at 18.

You mean between the age of 16 and 18?

Yeah. In terms of the serviceability for A bank calculator. If you've got an 18 year old child who's living at home, the bank doesn't take them into account with serviceability.

They don't have to. Yeah, yeah.

And even though you are, the idea.

Is that they'll often be working, they'll have their own job, so they are supporting themselves financially. Some reason, that's the household.

Yeah, I think most people I speak to who have 18 year olds, they're quite expensive. So. And it's just a. Yeah, it's a, it's a weird thing which the banks seem to think, okay, anyone over the age of 18 is independent and doesn't need to be taken into account for serviceability. So if you've got a 16, 17 year old and they're like a year or two going to be off the book, so to speak, in the bank size, that boosts your serviceability quite dramatically.

Yeah, well, even if you have a 17 year old that is working, so if they have a job and they're any income and you know, you say that they're contributing to the household bills, etc. Then you can often leave them off as a dependent as well.

And just the final piece here is every bank has different borrowing capacity calculators. And so you could be sitting there and let's say CBA's calculator comes in and so based on your income and your loan amounts, you could borrow 500,000. We've got banks that would lend you 600, 610,000, same income, same figures, just that every bank's different. And so some banks are really tight in terms of borrowing capacity. Other banks are a lot more open and generous.

And so that's even their specific investment property policies and how they treat certain like rental income, they do something called shading of rental income. So they'll only use up to 80% of the rental income in the calculators. Some lenders will actually use more, they use up to 90% or have different policies around it. So it's definitely not a one size fits all, that's for sure.

No, and the other factor here is you should each and every year be looking to see what your borrowing capacity is and actually increasing that if you can. And like we've just run through a few strategies there. But just having a measure like you, you're measuring the amount that you own your home loan, you should also be measuring what's the amount that I could borrow in the future if I wanted invest in property. And so that could be 225,000 for example. But your goal is, okay, next year, you want to get that up to 255 or 300, and so start measuring it. And so if any of you would love a borrowing capacity, just reach out to us and the team. We'll be able to run your numbers, as we've got the most generous borrowing capacities in the country. And it's just a really good number to know as to, if I wanted to, what could I borrow and how far am I away from getting something that's of quality? I mean, 225,000 borrowing capacity is not going to help anyone. You know what? You're buying a shed. It's not happening.

One of the beat boxes down at Brighton's.

Jesus. I don't think you get a beach box in Brighton. So, yeah, they're just some hints and tips on what we think you could be doing to enhance your borrowing capacity. How it's sort of looked at in the bank size, the shading of rental incomes. Everyone's got different calculators, but there's a lot in your power, which you can do to boost that. And not saying you should be buying investment, but just saying you should know what you could buy if you wanted to.

Yes, absolutely. Know what your options are.

Exactly. 100%.

Awesome. Thanks, Perry, that was great.

Problemo? Pleasure. Never a chore.

See you, buddy. Bye.