The current historically low interest rates have bumped up the borrowing capacity for most people, which in turn is allowing them to get into the market.
Increased borrowing capacity also allows people to release some of their equity, to help them through tough times.
It’s important to understand how banks lend money. They want to know who is borrowing the money. They want to know if you’ve got dependants and what the purpose of the funds is for. But as you can see in the image below of a bank calculator, banks are primarily interested in your cash flows.
They’re looking at your income and they’re looking at your expenses. So as interest rates drop, your expenses also drop. So because your expenses are dropping, the banks are prepared to lend you more money. Now they also look at things like job stability, credit history, or things of that nature, but really it’s all about your cash flows.
Access properties previously out of reach
Below is an example of a client who wanted to buy property not too long ago for around $500,000.
But with the higher interest rates, as you can see from the calculator, they would have needed close to about $425,000 because they had a deposit of $75,000 and were only able to generate $399,000.
The only way for them to make up the difference in that scenario is to come up with the additional cash themselves, but that could have taken them an awful long time to save those funds.
That same client today can walk into the bank and ask for a lower interest rate.
Such rates can be as low as 2.8% on some of those fixed rates for investment lending.
That means that the client in our example can now borrow $470,000. That $470,000 along with their deposit of $75,000 means that they have more than enough to now buy that investment property.
Those low interest rates have bumped up this individual’s borrowing capacity by about $70,000 and for them, that is really significant.
This client has a property worth $500,000 with a loan of $350,000 on their investment property. They’ve got $150,000 worth of equity – that’s the difference between the loan and the value.
This client can release this equity back into their Master Facility, particularly now that their borrowing capacity has gone up. You don’t want equity locked up in your properties because then you can’t use it. While your borrowing capacity is stronger, now is the time to do that.
You can also do the same thing with your mortgage. If you’re concerned about your cash flows, make sure you release some of your equity. You can do it through a redraw facility. You only pay interest on the funds that you use, but at least now you’ve got some funds available. And again, that provides you with a safety net and gives you some confidence.
Now, for those of you that have investment properties, you might also want to look at the cash flows because now that interest rates have also dropped some of those properties that were neutrally geared or had neutral cash flows are now quite possibly cash flow positive.
For example, you might be generating $150 a week or more, which can supplement your income. You might even want to replicate this scenario and again replace some of your income by buying another investment property. You can use the equity that you’ve pulled out of this investment property, or you could use some equity from your home. Then you might be generating another $150 a week, cash flow positive. So between those two properties, you’re looking at an additional $15,000 per annum.
Take advantage of the fact that we are currently in a buyer’s market. Learn how to generate some additional income streams for yourself by speaking to an AllianceCorp Property Coach.