Have you ever noticed that most media commentators follow the same old story angle every time there’s an RBA rate cut? They always trumpet how much the average homeowner will save (if the banks pass on the full cut) and that’s about it.
Well, this time I’d like to ask a different question altogether. Namely:
What does this latest decrease, and all the other recent ones, actually mean for an investor?
Now of course there are savings for investors, just like there are for everybody else, BUT investors always have one other important point to consider – getting access to more funds.
Usually we investors are looking to maximise our borrowings so we can maximise our potential to take up opportunities in the market. Now the best time to do this is usually when rates are low, especially when they are as low as they are now.
Remember that the critical element in working out how much you can borrow is the Lender’s own servicing calculator. (I’m not talking here about those token loan calculators you’ll find on many well-meaning websites these days.) What I’m talking about are the actual calculators that the Lenders use themselves to examine your financial position and work out how much THEY THINK you should be allowed to borrow. After all, this is the calculator that will actually determine whether you borrow or not.
So the very first thing you need to know is if the rate cut is being applied to your current Lender’s calculator. If it isn’t then the fall in rates actually means little or nothing to your borrowing power. This is because the assessment rate (which is the rate that the Lender uses to determine your borrowing ability) hasn’t changed. If this situation applies to you, then you will need to move Lenders to see any benefit from the most recent rate cut.
Ideally if the rate cut is applied to your assessment rate, then that should be reflected by a positive answer to the question, can I borrow more now than I could before?
Now, if your Lender doesn’t apply the rate cut to their assessment rate, you can still benefit from lower rates by reviewing your portfolio with the aim to release hidden equity.
There are 3 key things to consider in this case. They are: the amount you wish to borrow; how much you already with the Lender you are approaching; and how much you have outstanding with other Lenders. These points are all important because of the way a Lender views your situation. Each part of your application is subject to a varying set of rules. And these rules are not the same for each Lender.
For example, different Lenders calculate the amount you are receiving for rent differently. Some allow only 75% of the rent to be considered in the loan, while others will give you 100%. Whether the rent is for an existing property or a new property purchase will also have an effect. It’s these sorts of variations that can allow you to maximise your borrowing if you know how everything works behind the scenes.
There are also variations in how different Lenders will assess your existing debt and any new debt as well as how your other bank debt may be assessed. One thing to watch out for is, that it’s easy to be seduced by the interest rate specials made by Banks to get you to put all your lending with one of them. It’s a common ploy. However always remember that what you might save by putting all your loans with the same Lender invariably means you will be penalised by higher assessment rates which then reduces your overall capacity to borrow. Which can hamper your investing plans.
Even worse than that, is having your ability to borrow controlled by just one Bank. You become subject to their credit rules, their appetite for risk and their ideas about what’s best for you. This could have considerable impact on your future wealth.
If you take my advice and diversify your portfolio amongst different Lenders, then this risk is minimised. You can see how serious each Lender is towards risk by the way they usually load up the assessment rate on their own loans and take at face value the rate you’re paying on other bank debts. That’s because the other bank debts pose no risk to them as a Lender.
There are exceptions to all this of course, but generally, as the old saying goes, exceptions just prove the rule.
In my opinion, this is one of the main reasons for not putting all your eggs in one basket. When rates fall, the impact on your portfolio when you have all your borrowings with only one Lender is negligible for an investor. The repayments will drop of course, but your ability to borrow more can be severely hampered by that Lender’s assessment rates. And this one simple fact could be costing you real money.
As I said at the beginning, one of the most important issues for you as an investor is your ability to borrow and that ability is compromised if the calculator your Lender uses does not reflect the rate decrease.
Now if you have a couple of hundred hours you could study all the Lenders’ assessment rates but by the time you did, you’d have to start again as some of them would have changed in the meantime. Alternatively, you could ask us to undertake a free review of your portfolio and we’d discover this for you. If I were you, I know which one I’d choose!
Till next time,