Part 1: How To Boost Your Borrowing Power In A Rising Market

There are herculean upheavals occurring in the market right now. A pandemic, recessions, inflation, and rising interest rates have all taken solid swings at the property market, and the result? Well let’s just say many of us are or will be wading through a phase of economic turmoil. To ice the cake, borrowing power has plummeted too. 

With borrowing a critical aspect of investing in property, it’s important to understand if and how the current climate of lending will impact your ability to build a multi-million-dollar property portfolio. 

PUTTING BORROWING POWER BACK IN YOUR HANDS

While there’s no denying that there are many factors at play in today’s current property market, it’s important not to get caught up in the doom and gloom headlines. Experienced home buyers or property investors understand these cycles and know that for every up, there’s a down, and for every down, there’s an up – the market simply swings in roundabouts. 

Knowing how to leverage and adapt throughout these cycles is what will ensure that you are primed for growth and opportunity, which is vital for any long term wealth creation venture. 

In part one of this two-part series, we explore the threat recent declines in borrowing power could pose for you. Then, in part two, we will show you how to calculate your borrowing power and what levers you can pull to increase it. 

THE CURRENT LANDSCAPE OF PROPERTY

If you haven’t been living under a rock you will know that in 2022 interest rates have soared to record levels. Australian mortgage holders have been hit with seven rate rises from the Reserve Bank of Australia in a matter of months. 

We are seeing the largest and fastest interest rate rises since the early 1990’s. To rub a little salt into the wound for property investors, as interest rates are rising, borrowing power is nosediving.

WHAT IS BORROWING POWER? 

Put simply, borrowing power is the amount a lender is willing to loan you to buy a property. Whether you have yet to purchase your first investment or already possess a multi-million-dollar property portfolio, borrowing capacity matters.

Less borrowing power means less money to purchase a property. If you can’t borrow, or if borrowing is difficult, your pace of property acquisition slows down and your chances of forging ahead in the property market can become more challenging.

HOW HAS BORROWING POWER CHANGED AND WHAT DOES IT MEAN FOR YOU? 

Lenders have determined that it is much more challenging to afford a large mortgage in a high interest rate environment, so with every interest rate increase, your borrowing capacity will be reduced. 

According to our in house team at Positive Money, a 0.5% rate increase equates to a 5% decrease in borrowing power. A borrower who was pre-approved for a maximum loan of $750,000 when the cash rate was 0.1%, may only be able to borrow $520,000 when faced with a cash rate of 3.35%.

According to RateCity research, between May 2022 and October 2022 alone, the average Australian’s maximum borrowing power decreased by approximately 20%, or $134,000. 

You may still be able to buy something, but the type of property will likely have to change. For instance, instead of looking for a two-bedroom unit, now you might have to look for a one-bedroom unit. 

OPPORTUNITY AWAITS 

However, it’s not all bad news. There are significant approvals on the horizon. Firstly, the cash rate rises are progressively getting smaller. They are also slowing down. The aggregated opinion of the marketplace is ‘this too shall pass’. 

Further, as hard as it is to believe given the amount of negative news thrown at us on a daily basis, the truth is fortunes and success can be made in times of change and challenge. 

During the economic buzzkill of the Great Depression, many companies fizzled out, many sat on the sidelines, but many also innovated and strategised and capitalised on the opportunities created by changing times. Many companies thrived. 

The same is true now when it comes to property investment. Investing is not a get rich quick game, but if you act effectively you can still accelerate wealth creation through real estate. 

PREPARING YOURSELF FOR BORROWING SUCCESS

It’s not as ominous as it seems – but if you are new to buying property or investing – the current climate can feel overwhelming. Remember, knowledge is power. Even though these tough times will pass – phases like this have occurred before and are bound to occur again. 

The game of property investing is a little like the game of chess. Those players who can see three or four steps ahead are the ones who are going to win. 

So, it pays to have the know-how up your sleeve. In part 2, we teach you how to calculate your borrowing power and what levers to pull as a borrower to get the banks to lend you more even in the rising market. 

Learn how to maximise your borrowing power. Read Part 2 Here

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