Case Study: Strong Equity but Borrowing Capacity Was the Real Challenge

This case study describes a client scenario with identifying details changed. It is provided for general information only. Individual circumstances vary and eligibility for lenders and loan structures depends on personal financial circumstances, lending policy and credit assessment at the time of application.

Many property investors assume that if they have sufficient equity in their existing properties, purchasing another investment property should be straightforward.

However, lenders assess not only available equity but also borrowing capacity and loan serviceability. In many cases, servicing rather than deposit funds becomes the main constraint.

This case study highlights how one investor with strong equity discovered that borrowing capacity was the real barrier to their next property purchase.

The Client Scenario: Investor with Strong Property Equity

The client was an experienced property investor who already owned multiple properties.

Over time, these properties had increased in value and the client had built substantial equity across their portfolio. From a security perspective, there was enough equity available to contribute toward a deposit and purchasing costs for another investment property.

However, when the client explored their borrowing options, they found that their borrowing capacity had tightened significantly.

Despite having the equity required to proceed, the servicing calculations used by lenders were limiting how much they could borrow.

The Challenge: Borrowing Capacity Rather Than Deposit Funds

The issue was not a lack of equity or security. Instead, the challenge was how lenders assess serviceability.

When assessing an investment loan application, lenders typically apply several conservative measures, including:

• Higher assessment interest rates than the actual loan rate

• Shading rental income, meaning only a portion of rental income is counted toward servicing

• Including all existing commitments when calculating repayment capacity

• Applying actual living expenses (or minimum benchmarks)

These factors can significantly reduce borrowing power, even for investors with strong property portfolios.

In this scenario, the client realised that property equity does not automatically translate into increased borrowing capacity.

Reviewing Loan Structure and Servicing

Rather than approaching the situation as a simple pre-approval request, the focus shifted to reviewing the client’s full lending structure.

This included assessing:

• The structure and terms of existing investment loans

• How current loan repayments were being assessed in lender servicing calculators

• Whether any refinancing opportunities could improve servicing outcomes

• Differences in lender servicing models and rental income treatment

• The client’s overall financial commitments and liabilities

Understanding these elements helped identify where borrowing capacity could potentially be improved.

Improving Borrowing Capacity Through Structure and Lender Policy

Several strategies were considered to help improve the client’s servicing position while maintaining a manageable loan structure.

These included:

• Reviewing whether loan terms could be extended on selected debts to reduce assessed repayments

• Assessing whether refinancing existing loans could simplify the debt structure

• Comparing lenders with different servicing models, particularly around rental income treatment

• Reviewing the client’s existing liabilities and commitments to ensure they were reflected accurately in the application

• Matching the scenario with lenders whose policies were better suited to experienced property investors

The objective was not simply to maximise borrowing capacity, but to ensure the loan structure remained sustainable for the client’s long-term investment plans.

The Outcome

After reviewing the client’s existing loan structure and lender policy options, a pathway was identified that improved the client’s borrowing capacity sufficiently to support another investment purchase.

This involved restructuring parts of the existing lending and selecting a lender whose servicing model better reflected the client’s overall investment position.

The result was a lending structure that allowed the client to use the equity already built within their portfolio while addressing the servicing constraints.

Key Insights for Property Investors

This scenario highlights an important consideration for investors building a property portfolio.

Key insights include:

• Strong property equity does not always mean strong borrowing capacity.

• Lender servicing models can significantly affect how much an investor can borrow.

• Loan structure and repayment terms can influence borrowing power.

• Refinancing or restructuring existing loans may improve servicing outcomes.

• Different lenders assess rental income and existing commitments in different ways.

Understanding how equity, loan structure and borrowing capacity interact can help investors plan their next property purchase more effectively.