The key to building wealth faster is understanding your borrowing capacity.
Yet most people underestimate the power of leverage and treat borrowing capacity as an afterthought. This overlooks the immense potential that borrowing unlocks.
As someone who has built a property portfolio using leverage, I can attest that my wealth today would be a fraction of what it is without it.
The Concept of Borrowing Capacity
So, what exactly is borrowing capacity?
It refers to how much money lenders will provide you to invest in assets like property.
Banks and lenders use complex calculators that assess your income, credit score, existing debts, lifestyle expenses, and assets.
Ultimately, though, their main priority is risk management.
The more reassurance you provide that you are a safe bet, the more they'll lend you.
Calculating Borrowing Capacity
Banks don't pluck borrowing capacity numbers out of thin air.
Complex calculators crunch reams of data to determine how much they'll lend you.
As a property investor, I've learned that these assessments ultimately come down to the bank's risk tolerance.
Lenders scrutinise key personal finance factors like income, credit score, debts, and lifestyle expenses.
They also consider your assets, including property and other investments.
Essentially, they want reassurance that you can service additional debt.
The higher your income and assets, and the lower your debts and expenses, the more comfortable banks feel about lending you money.
A high credit score signals that you dutifully pay back debts, making you less risky.
You can take strategic actions over time to strengthen your borrowing capacity.
Navigating the Stages of Wealth Building
As my property portfolio grew, I realised each stage of the journey required recalibrating my borrowing strategy.
What worked early on would eventually hit limitations.
I continued ratcheting up my assets over time by evolving my approach at key milestones.
Early Stage: Making Informed Property Choices
In the early days, my deposit amount and property choice were critical for my future borrowing capacity.
I learned that the wrong initial property picks can completely hamstring you.
Getting the right asset early on sets you up to acquire more properties down the track.
Mid-Stage: Overcoming Lending Limitations
As a mid-stage investor, I hit the frustrating wall of banks refusing to lend me more despite a growing portfolio.
Refusing "no" as a final answer was essential to not stall out.
You must evaluate all properties dispassionately based on performance.
Assets draining cash flow hamper borrowing power. Take action to improve or offload underperformers.
Advanced Stage: Balancing Growth and Risk
At the advanced stage, the focus shifts to capital preservation and eliminating debt.
However, strategic new purchases can still occur if risks are managed prudently.
Here, your existing borrowing capacity guides family planning decisions around helping others financially.
Persistence, Patience, and Continuous Learning
After years of leveraging property to grow my wealth, a few key lessons stood out, allowing me to continually ratchet up my portfolio over time.
First, tenacity proved absolutely essential whenever I heard "no" from banks on borrowing requests.
Patience also proved critical during the frustrating middle stage of wealth building.
Finally, continually educating myself on optimising my borrowing capacity for each stage of the journey proved invaluable.
The key is balancing risk and reward at every stage, not getting attached to any property emotionally, and being willing to make hard decisions for the end goal.
If you stay tenacious, patient, and open to continual learning around borrowing capacity, you put yourself in a tiny fraction of investors who create truly life-changing wealth over time.
The leverage principles that served me so well can do the same for you.