One of the best ways to fast track your property portfolio is to maximise your “borrowable equity”.
Leveraging against assets to invest is a time-tested investment strategy that can work really well – assuming you invest in quality assets of course!
Maximising your ability to borrow can assist you with many things including upgrading of your home, buying an investment property, investing in the share market and funding short-term cash flow challenges.
Therefore, maximising your borrowable equity is key to ensuring you maximise your financial opportunities.
The main factors that determine your borrowable equity include:
- The bank’s assessment of the property’s value;
- The bank’s credit criteria; and
- The bank’s borrowing capacity.
- Make sure your loans are not “cross-securitised” or inter-linked. The reason for this is that you need to have the ability to select which properties you would like to revalue at which time. If your loans are cross-securitised, the bank will revalue all properties at the one time and you may not want that to happen in case a lower valuation on one property offsets higher valuations.
- Realise that revaluing your property at the same time might not be best. Differing types of property and locations improve at different rates and times.
- Follow the market so that you can keep track of comparable sales. Valuers will look for three (3) or more good comparable sales in the last six (6) months to influence their opinion. A property is comparable if the location, land size and accommodation are similar.
- Speak to your bank manager or mortgage broker and see if they think it is worth ordering more than one valuation. Some banks allow brokers to order valuations on properties. If another bank revalues your property for materially more than your current lender, it may be worth considering switching to continue your wealth creation strategy.
- Make sure your property is clean and well presented when the valuer inspects it.
- If you disagree with the bank’s valuation, request a copy of the report to check the details of your property are correct.
- Realise that valuations can be unpredictable at times. It is difficult for you to successfully challenge the valuer’s opinion and get the figure revised. Therefore, your only options are to switch lenders or live with the low valuation.
Property valuations can differ between lenders by large amounts.
Valuations on some of the properties I’ve seen recently differ between banks by as much as 20%!
Switching to a lender with a higher valuation can allow you to invest in another property. Quite often valuations stall any wealth creation strategies.
There are a few valuation strategies that can help, these include:
Also, be careful as to what type of property you buy.
The great thing about unique properties is that they have more “scarcity value”.
Scarcity value should translate into good capital growth.
However, when a bank valuer assesses a unique property, it is difficult for them to find a comparable property.
In this situation, valuer’s are more likely to be conservative, and conservative valuations don’t help active investors.
Buying a unique property theoretically helps the investor as they have a scarce asset which will likely enjoy strong capital growth.
However, this is only relevant if they ever sell the property and realise the value. If they consistently experienced conservative bank valuations because of the property’s uniqueness the property might not help the investor grow their portfolio.
Also, consider using different lenders as different lenders use different models for assessing how much a person can afford to borrow. Often it is possible to maximise your borrowing capacity by using certain lenders in a certain order.
A good mortgage broker can sit down with you and plan ahead to assist you with this.
It is often said the best time to approach a lender for more borrowings is when you don’t really need it.
Revalue your properties strategically. When you get a higher valuation, increase your lending limit to 80% on the new valuation. You don’t have to draw the funds so you don’t have to pay interest, but the money is “locked in” and available.
Maximising your borrowable equity is key to achieving success as an active property investor. It is important that you educate yourself about the above points and develop a trusted relationship with either your bank manager or mortgage broker.
If you would like any further information regarding your borrowable equity, please contact Ellingsen Partners.