Structure for Maximum Borrowing

When planning ahead for next purchases and considering tightening lending standards, which order of the following would allow the greatest borrowing capacity for next IP purchase? Is redraw, offset and a loan all treated in the same manner?

500k paid off IP
500k IP with 100k deposit and 400K in offset
500k IP with 100k deposit and 400k invested in shares
500k IP with 400k redraw invested in shares
500k shares

Any other options which should be on the list?

 

Borrowing capacity is largely determined by income and debt levels

$500k IP paid off would mean you have rental income but not debt.

$400k in offset would be totally disregarded for servicing.
$400k in shares could generate income which might be used for servicing with some lenders.

So the answer would be $500k IP fully paid off.

 

Yeah, if IP paid off you have income and not much outgoing.

The thing is though, over time lenders change things, so it is hard to plan exactly ahead, just work with a broker who keeps up with all the changes and be careful not to buy heavily NG property unless you have large income.

 

Structure is a lot more sophisticated than working off the limited information provided - it requires specific advice on your exact circumstances, so you would be best engaging a good investment focused finance strategist who can review your exact scenario and needs.

Whilst a freehold IP will certain provide the greatest capacity increase in those scenarios, dependent on the greater picture there would likely be a more effective pathway to go down.

 

Given that a few lenders still treat existing debt more favourably than new debt, paying off an IP may not be the optimal servicing option. Instead you might be better to have a loan over the IP and have more cash on hand so you don't need to borrow as much.

I'm not suggesting that this is the optimal solution either, rather you need to heed Cory's advice and understand that there's no simple solution.

 

Re answer to OP question, banks will calculate income & expenses to determine borrowing capacity. So its really a question about what income & expense levels would banks associate to the different scenarios presented:

1. Most lenders don't use income from cash. So offset funds don't really assist other than possibly adding more of a deposit later on (but can do this with liquidation of shares, etc).

2. Share income can be used with some lenders. Others require a couple years of dividend income evidenced before its used, so it won't help until time has passed & recorded on tax returns.

3. A clear property with rental income will likely assist most - 80% of rental income can be used. That being said, if its a 2% yielding property the borrowing power impact will be very different to a 5% yield, it may be better to buy shares with some lenders in this scenario.