9 ways to increase your servicability

While capital growth creates wealth, cash flow is the lifeblood of your portfolio. Many investors buy one or two investment properties and then they’re stuck because their serviceability won’t allow them to buy more properties.

1.    Consolidate unsecured debts into your mortgage
Unsecured debts (credit cards or personal loans) require repayment within a short period, which forces you to reduce your debts quickly. The result is high monthly bills.

When a lender performs their servicing calculations, these debts will weigh heavily against you because they limit the amount of available funds that could be used to make payments on the proposed mortgage.

One possible solution to this dilemma is to combine your unsecured debt with your mortgage so that it won’t be reflected as a financial commitment (automatically increasing your serviceability).

Be advised, however, that should you do this you will pay more in interest than if you had simply paid off your debt.

2.    Reduce excess credit, especially credit cards
Did you know that for every $1000 limit you have on a credit card, your serviceability is reduced by $30.00? So, for example, if you have a credit card with a $10,000 limit - which is not uncommon - the bank will reduce your unallocated funds by $300!

Even if you have a zero balance on your $10,000 limit credit card most banks will count that $10,000 as a liability.

You can immediately increase your serviceability by closing all of your credit card accounts except for one.  If you cannot close them all at once, then work on paying off those with balances until you’re left with a single credit card that suits your needs.

3.    Keep your financial records updated
•    Provide the most up to date information possible on your income levels to your lender.

•    Complete your tax returns on time.

•    Provide information on your entire income, rather than your last two payslips, as this short timeframe may not paint an accurate picture of your capacity to repay.

For example, if your base salary is low, but your employer gives you huge bonuses, this fact needs to be shared with your lender.  Your lender also has an option to obtain a Payment Summary from the ATO to calculate your income for their purposes.

4.    Select the right loan product
This is where a mortgage broker can be worth his or her weight in gold.

Each lender has their own criteria and guidelines; therefore it’s important to choose the right loan for your needs.

Different loan features can result in reductions or improvements to your borrowing capacity. Items like lines of credit, fixed or variable rate loans, and discounts will impact the amount you’re able to borrow.

Note that each lender has different rules for how they treat income. Some may disregard certain types, such as government benefits, while others accept them.

Remember that the more income your lender is willing to accept, the greater your serviceability. This is why it pays to find the right loan product.

5.    Shop around
Choosing a low rate mortgage can help shave off thousands of dollars over the life of the loan, but don’t forget that it also lowers your loan payment.

Obviously, lower payments equal greater serviceability!

6.    Split your liabilities with your partner
This strategy works if you plan to buy property under only your name.

Provide proof on paper to your lender that your partner is responsible for certain obligations and you may be able to increase your serviceability.

For example, you could show that your partner supports - and will continue to support - your dependent children and the lender may disregard any financial costs associated with their care.

7.    Cross collateralise (yeah, we know)
Yes, I know we’re always telling you that it’s not a good idea to cross collateralise your properties - but I would be remiss to not mention this little strategy to improve your serviceability.

Cross collateralising your loan will allow you to borrow at a higher LVR, which means you reduce the amount you’ll need to come up out of pocket.

Unfortunately, if you have difficulty making your loan payments the lender has recourse to repossess ALL of the securities necessary to satisfy your obligations.

And, you also limit your options, as a cross-collateralised property may be difficult to refinance with another lender.

8. Extend the term of your loan
A longer loan term means lower monthly payments. If you need to improve your serviceability you might consider extending your loan terms.

Although 30-year mortgages are the norm, some lenders offer 40-year loans. Just a 10-year difference can shave hundreds off of your monthly repayments.

Obviously, this strategy will increase the overall interest you pay for the loan, but it may be a useful option to consider over the short term if you’re still growing your portfolio.

10. Save...and then save some more!
This is one of my favourite strategies because it’s easy to implement and doesn’t require anything more than effort on your part.

Save at least three to six months for the deposit on your loan or if you’re using equity, build up as much as possible before getting your loan.

Finally, careful planning and determination to pay down your debts - both secured and unsecured - is a foolproof way to increase your serviceability with little to no risk to your financial freedom.

Sam Saggers
Sam Saggers is the CEO of Positive Real Estate, one of Australia's leading property investment and educational companies and highly sought-after buyers agencies. As a licensed real estate agent in every state of Australia, Sam's passion is assisting people to invest successfully in the Australian property market. He has personally brokered over 1,600 property deals in his fifteen-year career and has helped to educate more than 5,000 people in real estate principles through Positive Real Estate. Sam is the co-author of Think and Grow Rich In Property by Stuart Zadel and How to be in Debt for Millions and Be Happy About it and is currently in the process of writing another book on investing in property in Australia. Sam Saggers is also a keynote speaker on real estate and has recently founded the Property Wholesales Co-operative.