There is a big difference between asking, “Can I afford this property?” and asking, “What will my borrowing position look like after I own this property?”
Australian lenders are required to stress-test a borrower’s ability to make repayments. APRA currently requires banks to assess residential borrowers at an interest rate at least 3 percentage points above the actual loan rate.
That buffer is designed to make sure borrowers can continue meeting repayments if interest rates rise or their financial circumstances change. It also means every additional loan affects the numbers when you apply again.
The property might look affordable today, but if the debt attached to it consumes too much of your future borrowing capacity, it can potentially slow down the rest of your strategy.
Household Cash Flow Matters More Than Many Investors Think
Rental income is important, but the bank does not simply look at the rent coming in and assume the property pays for itself.
You still have loan repayments, council rates, insurance, property management, maintenance, vacancies, body corporate costs where applicable, and your own household living expenses.
That matters because lenders assess your ability to service all of your financial commitments together.
The RBA’s latest research also shows that investors tend to carry higher debt relative to income than owner-occupiers. Around one in five leveraged property investors in the RBA’s dataset had housing debt exceeding six times their income.
That does not mean those investors are automatically in trouble, but it does demonstrate why your overall debt position matters when trying to continue building a portfolio.
Equity Creates Options. But It Isn’t the Whole Story
Investors often assume that if their first property increases in value, they will simply use the equity to buy again. Sometimes they can.
But equity and borrowing capacity are not the same thing.
You might have significant equity in a property but still struggle to borrow more if your income cannot comfortably service the additional debt.
That is why portfolio planning needs both sides of the equation: equity and serviceability. Equity may provide the deposit, but your cash flow and income still have to support the loan.
Why Sequencing Matters
Imagine two properties that are worth the same amount and may even have similar long-term growth potential.
One produces stronger rental income, requires less cash from you each week and leaves you with greater financial flexibility. The other places significant pressure on your household cash flow.
Those properties may have very different effects on your ability to make the next purchase.
That is where sequencing comes in.
Sometimes the best property for your portfolio is not simply the property with the highest projected growth. It may be the property that gives you the right combination of growth, income and manageable debt so that you can continue moving towards your longer-term goal.
A “Good Property” Can Still Be the Wrong Purchase
This is where things get interesting.
A property can be perfectly good on its own. It might be in a good suburb, have strong tenant demand, offer solid growth prospects and be a well-built home.
But it can still be the wrong property for you at that point in your strategy.
Perhaps the cash flow is too negative. Perhaps the purchase price uses too much of your available borrowing capacity. Perhaps you need to preserve flexibility for another opportunity. Or perhaps your household budget simply cannot support the holding costs comfortably.
That does not make the property bad. It means the property and the strategy do not align.
There is an important difference.
Build a Portfolio. Don’t Just Collect Properties
At Property Friends, we do not believe successful property investing is about accumulating as many properties as possible.
The goal is to build a portfolio that moves you towards financial independence, choices in retirement and the lifestyle you want.
That requires thinking beyond the first purchase.
You need to consider where you are today, where you want to go, what this purchase will do to your cash flow, what it will do to your debt position, what your borrowing capacity may look like afterwards, and whether it leaves enough flexibility for the next stage.
Those questions are just as important as the property’s expected rent or growth rate.
Because property investing is not about winning one transaction. It is about making a sequence of decisions that work together.
So before you ask, “Can I buy this property?”, ask one more question:
“What does buying this property allow me to do next?”
That may be the question that makes the biggest difference to your portfolio.
Property Friends, your trusted partner in building financial independence, choices in retirement and leaving a legacy.
Disclaimer
This article is general information and education only and does not constitute financial, credit, taxation, accounting or legal advice. Property Friends provides property investment strategy and mentoring. Lending policies and individual borrowing capacity vary between lenders and borrowers. Always seek appropriate professional advice before making investment or finance decisions.
