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Buying a property, whether it’s your first or your fifth, is a well-established pathway to long-term prosperity.
It’s a brick-by-brick journey to building personal wealth and it requires patience and discipline to achieve your goals.
But acquiring property isn’t just about selecting an asset and sitting tight.
In fact, building a portfolio is a strategic interaction of moving parts, and one of the most substantial aspects is finance.
Accessing adequate funds when the time is right allows you to accumulate a portfolio of assets while also reducing pressure on your day-to-day household budget.
So, what are the key steps for using finance to grow your prosperity?
1. Setting goals:
Step one is asking yourself what you really want to achieve with your portfolio.
Are you looking to travel in style come retirement, or would you simply like an early exit from the workforce?
Are there major fiscal milestones you’d like to achieve along the way, like upgrading your home or putting the kids into an excellent school?
Spend some time thinking about your goals.
Think about life 10, 20, or 30 years from now.
Will you have dependents to support?
Will you be preparing to downsize? Could an interstate move be possible?
Or an overseas one?
What could a rental income from three or four homes do for your lifestyle?
For your family?
Understanding your goals – both ultimately and progressively – allows you to determine when it’s best to draw on finance, and to what degree.
And don’t be scared to dream big as one of the best quotes I’ve ever heard when it comes to goal setting is “You are better to set your goals high, and fail than set them low and achieve them!”
2. Financial clarity:
Setting goals is the first step – sketching out bold goals unfettered by limitations must be done before looking at finances and budgets.
Dream big before you crash into the reality of the hard work that will make it all happen!
To buy a property in Australia you will need (in most cases) a minimum deposit of five per cent of the purchase price.
A deposit this small, however, will incur additional costs, such as the lender’s mortgage insurance (LMI).
But this is insurance that the lender takes out in case you default. A larger deposit will prove to the bank that you’re a safer bet and thus reduce or remove the need for LMI.
There are ways to avoid this such as using a guarantor and this is a great way to get started in either home ownership or investing for the 1st time.
The second step to a property purchase is understanding exactly what your budget is.
Have you added up the cost of all the streaming services, the meals out, and the bought lunches?
How much money do you have leftover at the end of your pay cycle?
Is it enough to save for a deposit?
Probably not.
You’ll most likely need to make some adjustments to your spending habits.
Don’t tense up – there’s no suggestion that you need to scale back to the life of a first-year uni student.
Getting financial clarity is about making rational, calm decisions about what you want to prioritise.
Nothing beats the clear-eyed understanding of going through your bank account, line by line, and seeing in black and white exactly where your money goes every day.
Once this has been done you will be in a good position to make decisions about what spending you’re happy to keep and what you want to trim.
And when it comes to budget, remember to allow for additional expenses such as:
- Stamp duty
- Loan application fees
- Legal fees
- Professional inspections, and
- Home and contents insurance.
Saving for a deposit can take time – how much time is up to you.
3. Borrowing capacity:
The next step is bringing in the professionals and making some big decisions:
- How much can you borrow?
- How much should you borrow?
- How much will you borrow?
Talking about borrowing capacity is a crucial step filled with temptations and pitfalls that bring many undone.
Your borrowing capacity is about more than how much money you earn.
When lenders assess your borrowing capacity they run the slide rule over all aspects of your financial life.
While it’s easy to think that banks will lend you money based solely on your income, it’s a little more complicated than that.
Your salary is certainly an important factor in determining your borrowing power, but a number of factors come into play.
These include:
- Are you a dual-income household, or the sole provider?
- Are you a salaried employee, or is your income sporadic?
- How many dependents do you have?
- Fixed and discretionary expenses?
- Credit history along with any credit cards you might have and their limits (lenders base assessments on all credit cards being extended to their full financial limit)
- Personal loans
- The term of the loan you’re applying for – how long it will take to pay it off.
When answering the question, how much should I borrow, look at things such as your job security (will you be able to make repayments if you lose your job for a while?) and the state of the economy.
When making your loan application, this is too important a step to simply wing it.
A good mortgage broker will be able to help.
It’s important to understand that when you use a mortgage broker, you’re tapping into a professional who has a network of relationships with lenders.
This is a powerful tool to have in your corner when you’re making big decisions that will impact the next 20 years or more of your financial life.
4. Stay sensible:
At some stage during the journey, you may find that you are approved for a higher loan than you imagined.
If this is the case, can I just caution you on the importance of maintaining balance and staying on top of your numbers?
It might be tempting to grab as much credit as possible and build your portfolio fast, but this is also where a miscalculation can bring your long-term strategy undone.
If you don’t ensure there’s adequate income from either your rental properties or share dividends and wages to service your loans, there could be problems on the horizon.
All it takes is an unexpected major repair or period of vacancy, and suddenly you’re under extreme financial pressure.
Instead, take a look at your numbers and allow a buffer for the unexpected.
Understanding lending and how to best utilise finance as part of your investment plans can be tricky, but this is where an experienced mortgage broker can help.
They understand how lenders operate, what they require as part of the approval process, and what commitments you are signing up for when you take out a loan.
All key elements when it comes to creating a successful property portfolio.
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