Opportunity knocks for property investors to optimise access to capital

Lending is a game and the banks are the squares on the board.

It’s a misconception that high-quality investment opportunities are scarce.

The reality is that a diligent investor can usually find a sufficient number of high-quality investment opportunities. The true scarce resource is access to investment capital, which for most ­people includes borrowings.

At the moment, there are two distinct cohorts of borrowers. There is a group that has been ­affected by COVID-19, such as those who have had their employment income reduced.

But also, there is a large cohort of people whose income is unaffected. In fact, some of these ­people are now in a stronger financial position, as the lockdowns forced them to reduce discretionary expenditure.

It is this group of people that should now consider optimising this scarce resource — that is borrowings, particular if discretionary expenditure has been minimised due to COVID-19.

The first step is to ensure you minimise the cost of borrowings, especially when banks are offering very low fixed interest rates, thanks to the unlimited three-year funding from the RBA at 0.25 per cent.

It is also wise to maximise your access to borrowings, even if you do not have any immediate plans for its use: as they say, the best time to borrow is when you don’t need the money.

There is merit in considering whether it is advantageous to be a contrarian borrower.

According to the ABS, the value of lending to investors in May was more that 27 per cent below the value in December 2019. This means there are fewer investors in the market to complete with. That could work to your advantage.

Your borrowing limit is either self-imposed or imposed by the banks. Irrespective, it is common sense that all scarce resources should be allocated as efficiently as possible, borrowings included.

When reviewing borrowings, property investors often focus solely on cashflow. That is, if a property’s rental income is more than enough to pay for all its costs including interest, then most investors would be happy to retain the property on the basis that “it’s not costing them anything” (cash flow). This conclusion would be the correct one if borrowing cap­acity was unlimited. But it’s not. The opportunity cost must be considered. Namely, that borrowing capacity could be used for a higher-quality asset that may produce higher investment returns.

Ultimately, there are two factors that determine your maximum borrowing capacity.

The first and most important consideration is your personal ­financial position including cashflow and risk appetite. You must never borrow more than you can afford or feel comfortable with.

The second consideration is how much banks would be prepared to lend you. This is determined by credit policies and parameters, which can vary significantly from bank to bank. 

In my experience, over the past three decades the banks have almost always been willing to lend a borrower more than what they would be comfortable borrowing.

However, that has changed significantly over the past few years. For example, we have clients, albeit a relatively small proportion, who are able and willing to borrow more, but do not fit within the bank’s parameters. They have been locked out of the lending market. Borrowing cap­acity is an even more scarce resource.

For the majority, safely maximising your borrowing capacity could involve improving your cashflow and expense management, optimising your credit score, maximising bank valuations and so forth.

As an investor you must realise that different lenders suit different borrowers and scenarios. Lending is a game and the banks are the squares on the board. Often you have to move around the board in order to advance your financial position and access to capital.

Of course, some investors, particularly ones with less experience, often worry about the market falling in value and therefore delay any investment plans. But a simple mathematical analysis proves that “timing” the market only matters if you buy the wrong asset.

Stuart Wemyss is an independent financial adviser and author of Investopoly & Rules of the Lending Game.

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