Many Kiwis want to invest in property. They get excited. Find a property they think will make a good investment. Then they apply to the bank for the money. And just as it seems like they’re on the path to financial freedom, the bank says “no”. Heartbreak.

What should these clients do? They still want to get ahead financially and think investing in property is the way to do it for them,

But they can’t get a loan to invest. At least, not yet.

For the most part – in fact in almost every circumstance – these investors are left on their own. Bankers don’t want to help because they don’t fit the box, and brokers don’t want to help because there’s no payday in sight. So, the clients are left to figure it out or themselves.

Now, over time the amount they can borrow from the bank will increase.

Their equity will improve as their house increases in value, and their incomes will rise through inflation and advancing their career at work. So, if you can’t get a mortgage for an investment property today, perhaps you’ll be ready in six years.

But that’s still a long time away. Couldn’t you shortcut the process? Could there be a way to get it down to one or even two years? That’s what our process for getting investment ready is all about.

It gives you six real strategies you can use to get investment-ready faster. This is the fourth in our series for this magazine.

Strategy Four - Commitment Issues

This strategy is one of the most potent ways to increase your serviceability (the income side of your mortgage application).

It involves finding ways to decrease your bank-recognised expenses. When the bank assesses your mortgage it runs your loans, credit cards and hire purchases through many calculations. These look at what would happen in the worst-case scenario. Like if interest rates increase substantially or you spend the entire limit on your credit card and don’t pay it off. This makes the minimum repayments you are committed to look more costly to the bank than they seem to you.

So, in this strategy, you restructure your financial obligations so the minimum repayment you’d need to make in the worst-case scenario is lower than it would be now. This would involve something like a debt consolidation, limit reduction or restructure of your mortgage.

The Problem It Solves

This strategy improves your servicing by reducing the minimum repayments you have to make against your debts.

The Commitment

What do I need to use this strategy?

• You need to have a financial product that can be restructured.

These are things like:

1. A mortgage (ideally with 25 per cent or more equity in the property)
2. An unused credit card, or unused store card (e.g. Farmers card)
3. Personal loan
4. Hire purchase
5. Overdraft, or something along these lines.

These are the kind of things that look like they require high repayments when the bank runs its calculations.

Exactly How It Works

To illustrate how this works let’s use the example of an unused credit card with a $13,000 limit.

Because you’re not using this, you might think, “I don’t spend any money on it; why would it impact my ability to get a mortgage?”

But, when one of the main banks in NZ runs their calculations they would say this credit card costs you $400 a month. They’re considering what would happen if you maxed out the card. So, if you cancelled that credit card you could borrow an extra $101,195, based on our calculations (using today’s criteria).

So, in this mortgage play, you restructure your financial obligations by doing things like:

• Cancelling any large credit cards
• Extending the documented term of your existing mortgage, for instance, from 16 to 30 years.
• Consolidate your personal loans, hire purchases and overdrafts into your mortgage, to extend the documented term

While you will increase the documented term of your home loan under this strategy, you can still pay off your debt in the same time frame. And we would recommend you do.

We’re not suggesting you need to pay off your mortgage in 30 years, rather than 16. It is just how it will be documented.

You then use the Mortgage Buster strategy to pay off your debt over the same time frame.

Steps Required

• Ask your mortgage adviser which of the tactics applies to you. Not every tactic can be used in every situation.
• Once you’ve identified the steps that will work for you, you’ll need to cancel credit cards or apply to extend the terms of your loans. This may involve refinance to make this work most effectively if your current bank isn’t so willing.
• Remember, you can set up a revolving credit or offset account (like in the Mortgage Buster) to continue smashing down your debt.

Handy Tip

This strategy takes some serious number-crunching and knowledge of bank policies. So, be sure to ask your mortgage adviser about which ones will work for you.