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Rental scaling - how it works & why it's important

Buying another property is often on the cards for a lot of our clients, particularly those who are looking to build a long term rental portfolio, but there are some very good reasons to get your ducks in a row and your finance sorted for a new purchase early on.

As you buy more properties (and likely your rental income also increases), we gradually need more income to be able to prove you can continue to afford to borrow the new funds to purchase the new property.

Investors who are perhaps balancing a growing rental portfolio with family life and/or another career can get caught in what we call the “diminishing returns” of income from a bank perspective.

So while you’ve run the numbers on a new property with your accountant and worked out that you’ll have a healthy yield across your portfolio, the bank takes a slightly different view to rental income (and particularly some of the newer forms of income like rent by the room, non permanent outside rooms and Air BnB).

Most banks will scale rental income at 75% - that is if you receive $500 / week for your new property, they’ll use $400 / week for servicing purposes. You can imagine that as your portfolio and rental income increases across several properties, the way the bank views this income can start cutting into how much you can borrow overall. Throw into the mix that you manage your own properties and don’t earn a salary yourself, and it can become more of a challenge to source funding.

We have experience with all of these situations as we manage them every day. We can review your current position and even recommend some changes to what you’ve got in place to maximise your borrowing power for when you’d like to purchase your next property.

Planning is key, so talk to us about how to put things in place so we can make the most of the current income you’re receiving and tick the boxes for you to buy again soon.

Adam, Claire & the My Mortgage Team