Unlocking borrowing capacity through debt restructuring

As a mortgage adviser, a lot of clients come to talk to us because they've been told no by their lender. 


Servicing constraints are one of the main reasons they are told no. While economic reality might dictate you can afford it, lenders ensure you can repay your loans over the agreed loan term, at a sensitised interest rate to ensure you can still meet agreed repayments should interest rates rise.


Lender sensitivity rates typically vary from 1-2% above variable interest rates, putting them 3-4% higher than available fixed-interest rates. As these assessments don't vary all that much this difference in rate is a small contributor to the difference between what each lender is prepared to lend to you.


The more prominent part to the equation is the agreed loan term. Loan terms can vary a lot, and each lender takes a different approach to determining the loan term based on a variety of reasons. Simply put the shorter your loan term, the higher your repayments are going to be, and the more of your income it's going to chew up.


Consider the scenario below where we take a look at how a restructure can create additional borrowing capacity to help an investor purchase more property.


Current Portfolio/ Loan Structure

Portfolio Value: $3,000,000

Loans: $1,800,000

Remaining Average Loan Term: 23 Years

Sensitised Interest Rate: 6.5%

Monthly Sensitised repayments: $12,583


Restructured to a lender with lower sensitivity rate (no change in the loan term)

Portfolio Value: $3,000,000

Loans: $1,800,000

Remaining Average Loan Term: 23 Years

New sensitised Interest Rate: 5.8%

Monthly Sensitised repayments: $11,825


Restructured to a lender with lower sensitivity rate and extension of the loan term

Portfolio Value: $3,000,000

Loans: $1,800,000

New Loan Term: 30 Years

New sensitised Interest Rate: 5.8%

Monthly Sensitised repayments: $10,562


You see the change in sensitivity rate reduces the monthly sensitised repayments by $758, but the extension of loan term reduces them by a further $1,263. 

That combined monthly reduction of $2,021 is enough to service another $345,000 of borrowing!


If your starting to encounter servicing constraints in growing your portfolio consider these tips:

Restructure historical loans now sitting on shorter loan terms, back out to longer loan terms. (This doesn't mean you need to change your actual repayments, it just means your contracted repayments are lower).
Cease interest-only loans and resume principal repayments. If you have a 30-year loan term that starts with 5 years interest only, your loan term gets assessed as being repaid over 25 years, reducing the borrowing capacity.


This example is intended to highlight the importance of debt structuring on borrowing capacity, and that a good financing strategy is a key to a good investment strategy. This strategy will not suit every investor/borrower and you should seek personalised financial advice for your own investing/ borrowing requirements.


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