88% LMI sweet spot

Discussion in 'Loans & Mortgage Brokers' started by SaberX, 11th Sep, 2015.

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  1. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Rental reliance is a policy that some lenders have like Firstmac, Macquarie and Westpac (although Macquarie has a little flexibility) whereby they don't like it when 50% of your income is more than your total income. They deem you "rental reliant".

    The lending landscape is changing rapidly and how I am structuring my stuff is using Homeloans to pull out chunks of equity particularly @ 85% no LMI. Homeloans have a good cash out policy whereby they don't put restrictions on the equity release portion like Firstmac do.

    This is for scenarios where investors have hit their max borrowing capacity with the other lenders including NAB (which has the most generous servicing calculator out of the mainstream lenders).
     
  2. Redom

    Redom Mortgage Broker Business Plus Member

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    Lasts another day with the Homeloans product Shahin, so a new strategy for cash-outs will be necessary from tomorrow COB. They were fantastic over the last couple months though and gave everyone a chance to release equity.

    Curious, have you (other brokers) had many deals with FirstMac with the rent reliance policy?

    There's seems to be soft (not hard coded policy), but at the discretion of credit assessors who generally don't like seeing large portions of rental income. At 80% for purchases, they don't seem to have a hard coded rule and relatively 'open for business'.
     
  3. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Hi Redom the Homeloans changes for the accelerate product are actually coming out on Tuesday so you have until COB Monday to get the application in. Even then, the changes to the servicing calculator isn't too bad. They are putting a loading of 20% on actuals and taking 80% of rental income.

    The big drawback with the product is that they will now be forcing clients to go on P&I for no LMI @ 85%. This is the NWO - IO loans are becoming a thing of the past.

    Re Firstmac their credit is a bit of a basket case. They don't credit score which is great but they can and will jack up the servicing ratio so you think its all good @ 1.05 NDI but they may turnaround around and say look the client is rental reliant so we need a minimum NDI of 1.10.
     
  4. Redom

    Redom Mortgage Broker Business Plus Member

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    Thanks Shahin - yep the inconsistency can be frustrating. Re Homeloans policy change, yep just double checked the date. Thanks, may be another busy weekend!

    Was this from Homeloans?

    I read the Pepper policy update direct from them last Friday and they mentioned a floor rate of 7.2% for all debt, similar to most lenders. Not the 20% buffered repayment model, similar to NAB.

    They did improve their employment policy a little bit though (similar to Classic and Flexichoice products).

    Direct cut and paste:

    Revised serviceability calculator
    Pepper has revised our serviceability calculator to reflect the most up to date market conditions. The main adjustments include:

    • 80% of Gross Rental Income will now be accepted
    • Couples or joint applicants living expenses will now be serviced at $26,724
    • All loans to be serviced at a minimum floor rate of 7.20% or 2.00% above the standard rate, whichever is the higher
    For more details on these changes, please talk to your Pepper BDM. The calculator will be available on the link below from 22 September.
     
  5. dabbler

    dabbler Well-Known Member

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    Is this application, if done today, any good for a pre approval, or do you have to know the exact amount to not be subject to changes once you find something suitable ?
     
  6. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Hi Redom yes its the homeloans accelerate product in which the 20% loading is applied. They should send out something later this afternoon confirming this.

    Dabbler - the pre approval lasts for 30 days.
     
  7. dabbler

    dabbler Well-Known Member

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    Hi Shanin, what I mean is.....

    If I get a pre approval for 350k and then a month from now buy a place for 250k, does the thing get re looked at as the amount is not near original application.

    To me, if it is less, it should not matter, but that does not mean you can use common sense at the moment in regard to such things.....
     
  8. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    As long as the loan amount is going to be less than the Pre approved amount then you are ok.

    However if there are material changes in the application such as say your employment, etc then this would make the pre approved application void.
     
  9. dabbler

    dabbler Well-Known Member

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  10. Redom

    Redom Mortgage Broker Business Plus Member

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    Spot on Shahin - Homeloans have split new/actuals out. They've just inputted a floor rate on assessment buffer, and adjusted the I/O effective rate. Servicing is still on par/slightly better with the better performers in the market.

    Serviceability changes

    oRental income used is reduced from 100% to 80%

    oCredit card limits assessed at 3% per month

    oWhen assessing serviceability as Interest Only, the actual P&I period will be applied. For example, if the loan is 5yrs IO, followed by 25yrs P&I, serviceability is assessed on a 25yr term

    oAll new loans are assessed at a minimum of 7.20% or 2:00% above the actual rate, whichever is higher.

    oFor existing loans, there will be a 20% loading applied to the actual repayment. For example, if the repayment is $1,000pm, then it will be assessed at $1,200pm
     
  11. sash

    sash Well-Known Member

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    Err...incorrect.....policy is policy.... this should not be an issue...it requires more effort on the part of the lender and broker. Shahin not a shot at you ...but....

    Here aer ways they look at to make a exceptions for rent reliance...:

    1. Spread of portfolio...are they all in one city..post code..mix of units..houses..etc.
    2. Are they in areas deemed high risk by the bank ...NAB..Westpac have this...they might not freely share this with you
    3. Rent reliance is NOT a hard and fast rule! It just takes a better presented loan to make it through and it requires a lot more discussions with Senior Credit people.

    Above all if one door closes...use other avenues....not all finance channels are available via brokers on this forum. There are other channels backed by the Big 4 which will not use the broker channels as they have their own channels. These ones are also one of the most generous in terms of funding.

    As I was saying to to newbies at the last meet...they need to take accountability...and DO NOT put blind faith with brokers. You need to understand finance as well..if you want to proceed to build a large portfolio...you need to under the structure (finance) which makes it possible as well as the vehicle (property). I realise this will not endear me with brokers...but hey this is a property investment site not a broking channel sales site...isn't it???
     
  12. sash

    sash Well-Known Member

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    All good points....but...see my comment in bold

     
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  13. Gruber

    Gruber Active Member

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    @sash I'm one of those newbies and the more I learn the more I realise that this whole deal is just about finance so I need to learn more about finance, I think it will provide more clarity when choosing the right investment.... got any recommended reading suggestions?
     
  14. sash

    sash Well-Known Member

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    Its been a while since I heave read books but for a base..try:

    1. http://propertyupdate.com.au/store/...-needs-to-know-about-finance-tax-and-the-law/ by the Doctor... ;)

    2. http://shop.destiny.com.au/secureshop/product.php?ProductID=204 by Magaret Lomas

    The above will provide a base...but the intricacies of finance will come with asking a lot of questions, practice, and reading.

    As a rule of thumb, this is what I look for in a loan:

    1. Use 88% + plus loans
    2. I like to capitalise LMI...it can be deducted over 5 years
    3. If you are serious about having a portfolio...putting 20% deposits is silly..particularly when you are cash or equity strapped early in your investment journey
    4. NEVER cross collateralise....never let anyone convince you of that it is okay
    5. Apply for a maximum term loan (30 years plus) with maximum interest only periods - i.e. 10-15 years up front
    6. Push rates down as much as you can.... 0.3% savings on $2m in loans is equivalent to 6k in savings a year plus whatever compounding affect added on.
    7. Never pay down the loan...put it in a offset..this can latter be used for personal items or another deposit. If you pay down a IP loan you cannot use if for personal purposes. Funds in an offset can be
    8. Fix rates to manage risk...particularly if you don't have a larget buffer
    9. Build a minimum of 6 month cash buffer
    10. Pull equity out in a strong market and keep it in offsets
    12.Always question a banks or brokers intentions...get educated so you know the finance game well
    13. Spread the loans across 2-3 banks. ...try not to give all your business to one bank. This is dangerous...the "all monies clause" or equivalent is very dangerous.
    14. Avoid banks which don't have retail banking background...especially if they are Merchant Banks ...ie. my concern about MacBank
    15. Insist on brokers or banks answering your concerns..if they brush you off..time to find a new broker or bank. Be very firm....and be ruthless about this if the relationship is not working.
    16. All banks and brokers have a use by date (MTR phrase...100% agree with this).
    17. Find the brokers or bankers who are experienced and have seen the full spectrum. I have trouble trusting anyone under 40...there are exceptions as I have dealt with one really great 25 year old banker..but as a rule of thumb...anyone without the scars is going to be able to assist me!

    Will add to above if I think of more stuff. :):D
     
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  15. Redom

    Redom Mortgage Broker Business Plus Member

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    As a broker, i don't mind that info @sash - all valuable to the PC community and worth sharing, particularly as its different from some of the generic 'benefits of a broker' posts. My post was just a direct copy paste about changes to a certain funders lending policies.

    + the reference to working out repayments after i/o period is gold - particularly in this environment and overlooked by most.

    Definitely different ways to grow, and for someone of a portfolio your size/diversified. In essence, your talking about an appreciation of finance, how it works and most importantly, how to work it to your advantage. IMO to achieve what you have in property, it is a must. You'll likely be treated as a professional investor at some point, and a professional investor (like any business) should have control/oversight over the most important external factor to their business (finance!).

    To the majority, a good broker/banker is an important part of jigsaw, particularly when starting out on a journey like yours. As one grow and hit some extraordinary numbers (Birchy/Mcknight/etc), leveraging/building relationships, know how, skills, etc will be an important part of the journey. Same goes for most other members of the team, but knowing it yourself will be important (proactive approach).

    Speaking to a few folks similar to your position and dealing on behalf of a few, for the sophisticated, property investing turns into a finance game. Get funding at x%, as much as possible for as little cash as possible, get a return of x+y%, 'earn the y%', compounding/leverage effect and utilise effective risk management strategies (like you've said, fixing, paying via offsets, etc). The sophisticated ones have access, know how and knowledge to find x+y% returns quite easily, and have appropriate systems in place to manage downside.

    If i do disagree with anything, i'd definitely say judge someone on their skillset, merit and knowledge. Talent wins over time all day long (coming from the public service, i definitely appreciate this!). Time helps, most definitely. Experience is invaluable. But apply such generalisations with caution, there are many exceptions to the rule (like your 25 y/old banker).

    Cheers,
    Redom
     
  16. sash

    sash Well-Known Member

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    Can live with this. I was careful not to generalize but a rule of thumb. In my case one of my best was a 25 year old banker but he moved from Westpac to all places AMP!

    The good thing about you Redom is you are not taking it personally...I am not having a shot at you just stating the facts based on my journey. Of course others may have a different experience...it would be great if people can post of their experiences. :)

     
  17. Gruber

    Gruber Active Member

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    Thanks @sash very helpful and makes me feel like I already know quite allot going through that list. I'm definitely one for many questions so I'm sure I'll learn the most when putting everything into practice.
     
  18. devank

    devank Well-Known Member

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    "2. I like to capitalise LMI...it can be deducted over 5 years"
    In my case, LMI is included I the loan making it 90% LVR. Are we allowed to claim interest on LMI portion if we deduct the LMI over 5 years?
     
  19. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    What you've got is effectively an 88% loan with LMI capitalised to 90% LVR.

    Quite a few lenders are only lending to 90% and no more for investors, so that's how it's structured.
     
  20. devank

    devank Well-Known Member

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    I wasn't asking about the 2% :)