How to Maximise Borrowing Capacity for Property Investment

Imagine a world where the best properties are within your reach, and money worries fade away. The secret? Learning how to maximise your borrowing capacity. Inspired by insights from The Financial Freedom Series Podcast, this guide is your step-by-step plan.

It’s filled with easy-to-follow tips and strategies to help you understand property investment and money management better. By the end, you’ll have the tools and knowledge to make smarter financial choices.

So, if you’re ready to turn your property dreams into reality, keep reading and discover how to unlock your full financial potential.

The Real Essence of Property Investment

At the heart of property investment lies a crucial concept: it’s not just about bricks and mortar. It’s about mastering the finance game. For you, this means understanding how banks view you as a potential borrower.

They’re looking to see if, after all your expenses and debts, you have enough left over to service a new loan. And they’re not just looking at today’s rates – they’re planning for the future, using buffers and stress tests based on higher interest rates. Deciphering the Role of APRA and Non-Bank Lenders

Regulations by the Australian Prudential Regulation Authority (APRA) play a pivotal role in how deposit-taking institutions, like banks, approach borrowing capacity. However, non-banks, which report to the Australian Securities and Investments Commission (ASIC), can have varied stress test rates.

These non-APRAs, including Liberty Financial and Pepper Money, often operate through broker channels, making it essential to work with a broker like Victor Lagos who understands their intricacies.

Demystifying the 3% Interest Buffer

Understanding the intricacies of financial regulations is paramount. One such regulation that has garnered attention is the APRA-mandated 3% interest buffer. But what does this mean for potential borrowers?

The Australian Prudential Regulation Authority (APRA) introduced the 3% interest buffer as a protective measure. This buffer ensures that borrowers can still service their loans even if interest rates rise in the future. In simpler terms, when assessing your ability to repay a loan, banks will add an extra 3% to the current interest rate to see if you can manage potential rate hikes.

Given the current climate of rate hikes and inflation, this buffer is more crucial than ever. It’s a proactive approach by regulators to ensure that borrowers don’t find themselves in financial distress should the economic environment change.

Interestingly, while APRA sets the standard, some banks are taking a more tailored approach. Recognising the diverse financial situations of borrowers, certain banks are introducing special rulings.

These rulings might offer a reduced stress test buffer, potentially making it easier for you to secure a loan. For instance, if a bank believes that the current interest rates are likely to remain stable or even decrease, they might opt for a less stringent stress test, benefiting borrowers.

Shading: What It Means for Your Finances

When banks assess your borrowing capacity, they use a technique called “shading” to account for potential income fluctuations. This conservative approach involves considering only a portion of certain types of income, like rental income from properties.

For instance, if you earn from a rental property, a bank might only factor in 80% of that income, safeguarding against potential future uncertainties such as vacancies or maintenance costs.

Different banks have varying shading policies, with some being more conservative than others. As highlighted in the Financial Freedom Series Podcast, understanding these nuances can significantly impact your borrowing strategy.

By familiarising yourself with different banks’ shading approaches, you can strategically choose a lender that aligns with your financial profile, optimising your borrowing potential.

Assets vs. Recurring Income: Where Do You Stand?

While many believe that substantial assets like multiple properties or a significant bank balance automatically boost borrowing capacity, the Financial Freedom Series Podcast  highlighted a different perspective.

They emphasized that lenders prioritize consistent and reliable income streams over assets when assessing loan serviceability. Assets, though valuable, don’t guarantee the liquidity needed for monthly loan repayments, whereas a steady income provides that assurance.

The importance of a stable income, especially when contemplating significant financial decisions. For those considering entrepreneurship or contract work, it’s advisable to secure loans while still having predictable earnings.

In essence, while assets form a foundation, it’s the recurring income that truly unlocks borrowing potential, turning aspirations into reality.

Strategies Tailored for You to Maximise Borrowing Capacity

1. Streamline your debts

Reducing personal debts can significantly improve your borrowing capacity. This includes actions such as closing credit cards and consolidating loans like car loans or hex debt. Immediate actions like reducing personal debts can have a direct impact on improving your borrowing capacity.

2. Re-evaluate the rent on your properties

If you own property and are outside of a lease agreement, consider increasing the rent. As the rent goes up, so does your income, which can improve your borrowing capacity. It is important to adjust rents to reflect the market and enhance your income.

3. Consider refinancing options

Refinancing existing loans with short terms (like 10, 15, or 20 years) and resetting them to longer terms (like 30 years) can increase your borrowing capacity. While this means you might pay more interest over time, the immediate benefit is a boost in how much you can borrow.

4. Align your expenses with benchmarks

Reviewing your expenses and aligning them with benchmarks can increase your borrowing capacity. Bringing your expenses in line with the Household Expenditure Measure (HEM) ensures you’re not exceeding typical household expenses, which can be favorable in the eyes of lenders.

5. Stay informed about insurances

Certain insurances, such as life insurance, health insurance, and income protection, fall outside of HEM. If you’re paying for these insurances, they can impact your borrowing capacity. It’s essential to be aware of these and discuss them with your broker or financial advisor.

6. Understand the power of trusts in managing borrowing capacity

Trusts, especially commercial trusts with a corporate trustee, can be strategically used to manage borrowing capacity. Trusts can help ensure that commercial debts don’t impact personal borrowing capacity.

If set up correctly and with the right financial guidance, trusts can be both a shield and a weapon in your property investment journey. They offer flexibility in managing debts and can be excluded from personal borrowing calculations if they’re profitable and meet their financial commitments.

Transparency: Your Financial Superpower

Every financial journey is unique, filled with its own set of challenges and triumphs. As highlighted in The Financial Freedom Series Podcast, transparency is paramount. It’s not just about being honest with lenders but also about being open with yourself and those involved in your financial decisions, such as partners.

For instance, undisclosed debts, like a partner’s hex debt, can impact joint borrowing capacities, emphasizing the need for clarity.

Being upfront about past credit issues or making abrupt career changes before applying for a loan is a common pitfall. Such oversights can complicate the loan approval process.

Being forthright about your financial history and current situation allows you to work effectively with brokers, ensuring your financial aspirations aren’t derailed by avoidable missteps.

Harnessing the Power of Trusts

Trusts, as highlighted in The Financial Freedom Series Podcast, offer a dual advantage in the realm of borrowing. Commercial trusts, when paired with a corporate trustee, can separate certain debts from your personal borrowing capacity.

If these trusts are profitable and can meet their financial commitments, an accountant’s letter can potentially exclude their debt from your personal borrowing profile.

As trusts mature and become more profitable, their profits can bolster your personal income, enhancing your borrowing capacity. This doesn’t necessitate stress-testing the mortgages under the trust.

While trusts can shield you from personal liabilities, they can also amplify your financial potential when managed correctly.


Navigating the world of finance might seem daunting, but with the right insights and strategies, you can unlock your full borrowing potential. This guide, inspired by the Financial Freedom Series Podcast, is your first step towards achieving the financial freedom you’ve always dreamt of. Dive in, absorb the knowledge, and take control of your property investment future.

At Lagos Financial, we understand the diverse financial needs of individuals. Whether you’re learning to manage your money, pay back credit cards, or you’re an established investor diversifying into commercial property for steady cash flow, we’re here to guide you.

Ready to harness the power of good debt and leverage for financial freedom? Book a Free Call with me today and let’s chart your path to success.

Disclaimer: The information in this article is for educational purposes only and is not professional financial advice. Personal circumstances, financial situation, and needs have not been considered. Please seek personal financial, legal, and tax advice before taking any actions based on the content of this article. The views expressed are the author’s own and do not necessarily reflect those of any organisation they are affiliated with. The author is not responsible for any losses or damages arising from reliance on the information provided.