How big investors get into big trouble
Many risks come with having a large investment portfolio. Investors at this stage may become overconfident and infallible. You may actually be at your most vulnerable.
A higher risk
- As your portfolio increases, the harder it becomes for you to borrow more.
- Banks have specific lending guidelines to make it more difficult for property investors with multiple properties to borrow more.
Your borrowing power
- It is crucial that you consider and understand your borrowing power when deciding on your next investment.
- Calculating it is not so straightforward. Most banks do a “stress test” on your portfolio to predict the effects of an increase in interest rates. This involves assessing your loans using a rate above the standard variable rate, with repayments on principal and interest.
- Investors with many loans on interest-only repayments may be declined a loan because their borrowing power falls just short in these tests.
What can you do?
- Choosing the right lender is vital, because there are large differences in the way banks calculate interest. There are banks who will assess loans using actual repayments, which can make the difference for investors with a large portfolio.
- Your borrowing power can be increased by hundreds of thousands of dollars just by choosing a bank with more favourable processes. It is important to be aware that this does not actually change the risk of your investments. Rates can and will go up, and for this reason we recommend that you play it safe and borrow below the maximum amount you can actually get.
- If you have reached your maximum borrowing capacity, leave funds on standby and be prepared to sell properties quickly if you encounter difficulty.
Your Loan to Value ratio (LVR)
- Although in your first forays into the property marker borrowing with as little deposit is ideal, having a large portfolio with little equity is very high risk.
What is LVR?
- Your Loan to Value Ratio (LVR) is the percentage of the property value that you are borrowing.
- This ratio should shrink as your property portfolio grows.
As a guideline, limits for investors should be:
- 80% LVR if they owe over $3 million
- 70% LVR if they owe over $5 million
- 60% LVR if they owe over $10 million
- However, this is the limit – the lower, the better!
Your relationship with your lender
- Lenders are concerned about your total exposure with them, as you should be read more…