Stuart Wemyss says investors need to take advantage of the lending rules to maximise borrowing capacity and build wealth.
Stuart is an independent financial advisor and mortgage broker who reveals how to ‘win the game of finance’ in his book The Rules Of The Lending Game.
But what is the game of finance? Stuart said it’s ultimately about borrowing as much money as you can, as safely as you can.
“The more investment capital we have access to and we put it to work, the more wealth we can build in the long run,” Stuart told KnowHow founder Bushy Martin on the Get Invested podcast.
“And that’s not me saying ‘go and borrow to your eyeballs and have no consideration to how you’re going to fund repayments and repay the loans one day’ and all those sorts of things. That’s a recipe for disaster.”
No matter your situation, everyone will have a ceiling on borrowing capacity. Stuart said the key is to understand what these limitations are.
“Is it your own beliefs around borrowing? Is it your own risk profile or is it your financial circumstances or is it you’re not using the right lenders or is it you’re not getting the right advice?” he said.
“So I think you need to build those team of experts to help you understand one of those limiting factors and how do you go about efficiently maximising it. And then you’ve got to learn the rules of the game, which set by the banks, and different lenders are going to have different rules that apply in different situations. And then you’ve got to then use those rules to your advantage.”
Stuart further explained that there are two influences to your borrowing capacity, with the first one being your affordability.
“So how much money do you have left over every month that you can contribute towards servicing a new loan? It’s really just about understanding what your core living expenses are and what your discretionary expenses are,” he said.
“But you really need to know what your non discretionary expenses are … And that will help you plan because then you can plan the worst case scenario … And you can make the decision at the outset as to whether you would be happy or unhappy to make compromises, and then therefore unhappy or happy to take on that additional debt.”
Stuart said the biggest mistake investors can make in this department is having ‘unconscious expenditure’ which can significantly lessen your surplus.
“Unconscious expenditure is expenditure that typically adds nothing to our standard of living, but costs a lot in terms of cash flow. And it’s typically a whole bunch of small little items,” he said.
“Maybe you buy two or three takeaway coffees everyday. And if you reduce that, you wouldn’t even notice it … But then if you sit down and add up how much you spend on takeaway coffee, maybe it’s $5000 a year. And if you ask will you be happy to spend $5000 on coffee or achieve your financial goals? You’d go, ‘no way’. My financial goals are far more important than some takeaway coffee. And so in that situation, you’re making a very conscious decision.
“But if you don’t track those amounts, you make an unconscious decision … But for most people it feels too restrictive and too hard. And so what I say to people is just put a certain amount of money into a bank account that specifically used for discretionary items.
“So, if we can find a surplus every single month and invest that surplus wisely every single month, we know over the long run that’s going to generate significant wealth.”
Stuart said the second element to borrowing capacity is knowing what the lender will assess. However, he said this will vary between lenders and depend on your circumstances, so it’s important to surround yourself with a team of knowledgable professionals.
“Their assessment might be significantly different. And certainly we’ve seen that over the last two or three years where there has been changes in serviceability and assumed expenses and all these sorts of things that weren’t necessarily in place. And hopefully we get some relief from some of those conditions some time next year,” he said.
“That’s the sort of stuff that you should be engaging with your experts and your mortgage broker. That’s going to help you be able to structure your finances and make financial decisions around maximising things.”
Stuart highlighted the importance of having both an accountant and mortgage broker working collaboratively to help you.
“For an accountant to sit down and say we think this is the best ownership structure is one thing, but then it needs to be practical. You know, can we implement it from a lender perspective? What are the cash flow outcomes and how does it impact on borrowing capacity? That particular structure, does it help it or does it retard our ability to continue to implement our investment strategy?” he said.
“You need to get everyone on the same page. So you need to be dealing with an accountant and mortgage broker that interact regularly and understand what each other’s doing and then understand your circumstances.”
He also revealed that investors need to not fixate on interest rates and to remember the long-term plan.
“I don’t think I’ve ever really worried about interest rates so much … I would much prefer to pay half a percent more or even a percent more if that’s going to extend my borrowing capacity, because I know I can put it to work and I can more than make up for what is a relatively small differential in cost,” he said.
“So I think that’s a really important point, is that maximising your borrowing capacity will make you a hell of a lot more money than trying to save half a percent on an interest rate and finding the cheapest lender.”
Finally, Stuart encouraged investors to not be disheartened by rejection or feel the need to stay with one bank.
“You’ve got to know when to hold them, know when to fold them, know when you’re going to win the argument, when you going to lose the argument. And just because the bank is saying no, doesn’t mean it’s the answer is no. The answer is no for them … It’s no big deal. You just keep playing that game to your advantage and you use lenders to your advantage,” he said.
“You can use different lenders at different stages as well … and that’s why you really do need a good quality mortgage broker that can sit down and develop a financing strategy for you.
“Having all your eggs in one basket can be risky. It’s not for everyone. But I acknowledge that, and sometimes it’s good to spread your lending. I think diversification as a strategy in almost every respect when it comes to financial services makes sense.”
Listen to the full interview here.
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