Boost borrowing power (investment income)

I am just doing some planning with my broker regarding ways to boost my borrowing power 12-24 months from now and an interesting idea has been floated.

Essentially, we have some excess cash funds (sitting on our offset account) which we can invest and he raised that 2 years of consistent dividend / trust distribution income reported can potentially be used as "income" for borrowing assessment purposes. Specifically, I would invest with a Private Credit Fund (I have invested with a couple of Funds in the past and have had no issues).

My 2 general questions were (a) are most lenders open to accepting investment income, as long as it has been consistent for 2 years+ and (b), more importantly, would the lender further "shade" the investment income reported, for borrowing assessment purposes, if they saw interest deduction claimed against the trust distribution income reported? Or would they consider the gross investment income reported only?

I understand the rules around "shading" income, different lenders have different rules in terms of what they will review as source document etc but was keen to more broadly understand how others tackle this + would lenders take the gross or net income (after interest deduction) when assessing.

TIA

 

What funds would you use for the deposit for the new purchase?

 

We are not looking to purchase a new property. Rather, I am looking to refinance the existing loan to arrange further "cash out" for one of our properties. This is the reason why the broker suggested this option.

 

Are you operating a company that you own?

 

No.

The investment will directly be held in an individual capacity.

 

They will shade the income in your tax return by 20% but if the underlying investment is in a mortgage fund they may be reluctant to accept it at all. Some major lenders will also take the current value of ASX shares for eg and use a deemed return which is always very low like 3% pa etc.

 

Did you ask your Broker these questions? Seeing as you were doing the future planning with them??

 

Yes.
As mentioned above, keen to understand and know what other brokers / borrowers were encountering. I always find others’ experience and case studies useful.

 

That’s what I’ve also been told but there may be exceptions. 3% seems low but this is also what I’ve seen with others.

 

Well what did they advise you in relation to those 2 main questions? Your post doesn't mention that.
You should ask them what kind of investments are acceptable for the strategy recommended, because as mentioned above, certain investments, like private credit funds, may not be acceptable for that strategy to work.
Would expect the Broker to mention how much $ you need to invest in order to improve serviceability by x amount, did they mention that?

 

Some lenders dont need 2 years, they'll work of the balance of share holdings you have.
Helps if you have a pretty strong balance sheet too.
If large enough, its a quicker way to bring it forward a bit.
And they'll take any shareholdings publicly listed - even if its in a non dividend producing stock.

A lot of techies use this policy to get big income boosts.

Many of the privates will work on this approach too, if its a strong 'character' to it -- i.e. your wealthy/potential/income rich/etc etc.

Yes they'll shade it, expect a 5x return on the income. E.g. a 10m investments, generates 300k in income, should boost your borrowing power by roughly 1.5m.

If your waiting two years, these general rules of thumb will adjust as serviceability calculators, or more specifically, assessment rates within serviceability calculators, adjust.

 

Invest $500K to be able to borrow and additional $75K... Smart

 

@Redom how does that work regarding the non-dividend producing stock and it boosting your borrowing?

 

Show evidence of it.
Bank takes balance of it.
Takes 3% of it. Shades it at 80%.
Adds it to your income.
The addition to your income should lead to a rough ~5x multiple of the addition amount (4-5).

No need for tax returns and 2 years of history.

Some of the proper savvy wealthy investors do this --- because they dont really like cash in offsets as their store of liquid funds --- and like the BC benefits too.

In terms of whether its smart or not, on a $ measurement - its quantifiable at different points.

E.g. since October, cash earns 6% or so in an offset. It's better than it was, but its not that hard to beat for savvy enough investors. Given the ASX is at a record high and up nearly 1000 pts, ~10%, over the past 5 months or so --- anyone who has sat on cash instead of investing it -- has earned a lower return.

For the majority of time periods over the last decade & longer term histories, the investment in cash (offsets) has produced poorer returns than many alternative liquid assets.

The BC boost is a bonus too

 

Oh also @dominoo what you buy matters - some private credit high yield fund probably doesn’t work. Stocks publicly listed do.

 

@Redom I think a podcast episode or video on levers to increase your borrowing power would be a good one!

 

Awesome will do it next run. Thanks heaps!