The importance of financial planning

For those looking to expand their investment portfolio and delve into more real estate ventures, a unique financial situation may surface, often known as “asset-rich but income-poor”.

This situation raises questions about the intricacies of borrowing, especially when the investor holds substantial assets but lack the necessary income to secure the loan required.

So, what exactly does it mean to be asset rich but income poor?

To be asset-rich implies that you have significant assets such as property holdings, stocks, a few cars, maybe even a caravan and a boat or substantial savings in your bank account.

Yet, despite your solid financial foundation, your income, whether from employment or self-employment, may not be sufficient to meet the loan requirements for your property investment goals.

In a situation like this, it’s essential to explore strategies to leverage your existing assets to boost your income potential.

Our brokers can provide valuable guidance to ensure you’re on the right path and making the most of your financial portfolio.

But why can’t I secure a loan based on my assets alone?

In the past, having a substantial asset base was often sufficient to secure a loan. However, recent changes in regulations have altered the lending landscape.

Nowadays, lenders not only assess your assets but also consider your income when determining your eligibility for a loan.

They employ various metrics, including:

• Debt-to-income ratio: This measures the ratio of your debt to your income
• Loan-value ratio: It assesses how much you intend to borrow in relation to the property’s value
• Serviceability: This factor examines your ability to make monthly repayments comfortably
• Borrowing capacity: Lenders determine the maximum loan amount they are willing to extend to you based on your income.

While having substantial assets is advantageous for your overall financial profile, it won’t significantly impact your borrowing capacity if those assets aren’t generating income.

So, how can you enhance your income and cash flow?

Improving your income and cash flow is vital to meet loan requirements and secure your property investment goals. Here are some strategies to consider, though it’s crucial to consult with a financial planner or accountant before making any significant changes:

• Transition to full-time employment: If you’re working part-time or on a casual basis, contemplate switching to full-time employment to increase your regular income
• Income-generating investments: Explore investment options like dividend-paying funds or bonds/cash products that provide a consistent return on investment
• Positive gearing: Consider investing in properties that generate positive cash flow, ensuring your rental income exceeds your expenses
• Optimise self-employed income: Self-employed individuals should consult with their accountants to explore income distribution strategies that align better with lender expectations.
• Debt reduction: Reduce personal debts like credit card balances or car loans. Lowering these obligations will free up more cash flow, which can be directed towards your mortgage.

If you’re uncertain about how much you can borrow based on your current income and financial situation, don’t hesitate to reach out to us. We can crunch the numbers and help you identify any potential stumbling blocks.