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As long as you've 20%, bank will loan the rest?

Discussion in 'Property Finance' started by inspiredbyprop, 6th Feb, 2016.

  1. inspiredbyprop

    inspiredbyprop Well-Known Member

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    This started from my work colleague telling me that "as long as you've the 20% deposit and a legit job, banks will loan the remaining total and don't even need to look at personal debt, income, expenses, etc. Although, bank will require the personal (debt, income, etc) information to complete the formality."

    To buy any property, we only require 2 conditions:
    1. 25% of purchase price (including the 5% purchase cost)
    2. A "legit" job (high/medium/low income)

    Now I'd to ask PCers if that statement is accurate (purely from financial point of view)? Does it not sound too simple?

    ----PS: If you're interested, you could also read on my personal situation below :)
    Current situation: only 1 PPOR
    a) Market value = 750k (already owned it for 4+ years)
    b) Remaining Loan = 350K (interest only)
    c) I've recently pulled out equity and it's currently sitting in a separate offset = 250k

    Can I now purchase a $1mil property?

    As I've now satisfied the 2 conditions above:
    1. 25% = $250k -> this will be coming from c (250K)
    2. I've a full-time job with medium income

    Note: I do currently have a MB. However, the answer I got on whether I could buy $1mil property, it sounds like a lot more complex than just the 2 conditions above.
    E.g. is the property for investment or live-in? if invest, what's the approx rental return etc.

    Thanks in advance!
     
  2. Foxdan

    Foxdan Well-Known Member

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    The answer is no. You need to prove you can service a loan.
    Eg. You inherit 100k, you may now have a 20% deposit but if your income isn't high enough to service repayments, you have no means of paying off a loan for the other 80%

    In your case, you would need to prove to the bank that you can service your 350k ppor io loan, your 250k equity loan and any investment loan that you now want to get. All depends on your income now.
     
    Last edited: 6th Feb, 2016
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  3. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    Completely false.

    Think about a labourer on $500 p.w. inheriting a $1mil property. Can they then sell it, pull out the $1mil and purchase a $4mil property?

    Not a chance.
     
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  4. Rugrat

    Rugrat Well-Known Member

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    Lol. I wish that were accurate.
    We have the 20% but our servicibilty at the moment is completely povo. No buying property for us at the moment.
     
  5. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Don't listen to that colleague about home loans.

    You need to demonstrate you can make the repayments - there are factors too.

    Cheers

    Jamie
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Completely incorrect.

    A lender would potentially be unable to recover the money if it did not make adequate enquiries as to the borrowers ability to repay the loan.
     
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  7. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Depends

    An unregulated loan to a company for eg has slightly higher chance of being assessed so aggressivlely, but the concept suggested means making a loan that is unsuitable by Asic terms . Good luck trying to the lender getting a judgement to recover a debt on that basis.

    Ta

    Rolf
     
  8. JetstreamVic

    JetstreamVic Active Member

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    Depends how blasé your friend was trying to be.

    If he was saying legit job, and meaning, job that can cover all of your repayments - then in a basic setting he is probably right.

    If you went to a lender and said I have lots of deposit and a job that covers all my expenses, then yeah, it's pretty much a formality. However, different structures may be required, lending overlays can apply, valuations are involved.

    So you need to be a bit more aware of what's going on, esp at the money your talking
     
  9. Biz

    Biz Well-Known Member

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    Lol get your colleague to register here so we can give him a paddling! o_O
     
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  10. Sonamic

    Sonamic Well-Known Member

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    You could try.
     
  11. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks guys. I must also add that:
    1. I heard (as I'm new in the workplace) that he had a few properties around Sydney. So my judgement is saying that he's abit of experience in IP.
    2. He also said in most cases... net rental return will cover almost the 80% of loan. Hence, it will only be a relatively small out of pocket (if any).
    3. In the worst case scenario for bank is they will take the 20% and sell the property.

    Logically it was kind of make sense to me and at the same time, I was looked like over analysing.
    Anyway, I reckon I could afford the repayment etc. But I'm sure bank will look at it from the more conservative view. Hence, we need MB to do the calculation etc.
     
  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    1. I've met plenty of people who have a few properties and have been totally surprised about how clueless they are. In theory investing in property over time would give you some decent experience, but quite a lot of people just seem to make assumptions and get through by blind luck.

    2. Depends on what the rates are and the yield. There's plenty of markets where yields are well below 4% of the property value and the math simply doesn't hold true.

    3. How much the banks take depends on how much the bank is owed, plus their costs (which can be significant). Hopefully 20% covers it, but property prices can (and do) drop, so again it may not hold true. The good news is that in 12 years as a broker I've never seen this worst case scenario occur to a loan I've written.

    Up until mid 2015 if a client did an honest budget and decided they could afford a loan, alongside a 20% deposit, it wasn't too difficult to find a lender to accommodate them. Today (post APRA) this is no longer the case. Getting the first loan or two isn't difficult. Loan three might get tricky and loan four or five can be downright impossible for many investors.

    You need to get lending estimates from a broker who has a good understanding of lenders criteria, not someone who works on assumptions or their own limited experience.
     
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  13. dabbler

    dabbler Well-Known Member

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    As others say, this guy is flapping his jaw and spitting out rot.....

    They look at lot's of things, including deciding if they want to have money in the place you propose to buy, they can knock it back on that alone !
     
  14. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks again everyone for the response. Good conversation overall.

    I'd stick to my MB's advice and perhaps, get a second opinion from MB in this forum when I get closer to my decision on the next step.
     
  15. Redom

    Redom Mortgage Broker Business Member

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    When lending you can generally break it down into a few components to get a loan.

    1. Deposits - your friend is saying that if you have this part down pat, than you can go on indefinitely.

    2. Serviceability - You need to be able to demonstrate you can make repayments on your loan. This requires an assessment of your income and your expenses, to see whats left over which forms the basis for whats lent out.

    To be fair to your friend, up until 12 months ago, so long as someone was purchasing at strong yields 4-5%, had a decent income, and were willing to purchase below their maximum price point - it was actually relatively a non issue for most investors - there were usually lenders out there willing to provide additional funds. Short story was once one bank starts say 'no no you have too much debt', walk over to the next one and they'll say yes.

    The game has completely changed as of mid last year - where how much you can borrow is much more closely tied to your income levels. On a standard income, as Peter mentioned, you may be able to get your first few, but going on indefinitely is much more difficult.

    3. Clean credit history - defaults/etc can very quickly become an immovable brick wall to a deep property accumulation plan.
     
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  16. dabbler

    dabbler Well-Known Member

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    Re point 2 , well maybe, maybe not with a lot as prices have moved a lot, you can calculate it, but remember, your calculating at lowest interest rates ever.

    re 3. Well if this happens, you can usually kiss goodbye any further property buying, at least at normal rates, you will read a lot of people on hear carrying a loss year on year, they do not just walk away, they foot the bill.

    Re your friend, well just because he has done ok, does not mean it cannot be stuffed up, also as someone else said, I too know people who have property and yet do things that would be considered not well thought out here.
     
  17. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks Redom for clarifying on the recent change in serviceability policy.

    For the credit history, of course we are not hoping for defaults. But my colleague was just trying to highlight (or encourage me) that there is only a very small risk for the bank if we could afford the 25% upfront. Even if the return is -ve, as he put it: "the weekly cost would likely be a family movie ticket, popcorns & drinks" :)
    Can you afford going out for a movie with the family? of course, I can.

    I need to line up the proper financial plan with a MB in order to make it a reality.
     
  18. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    Ha ha ha that's a good one.

    Confusing equity with serviceability (common mistake).
     
  19. albanga

    albanga Well-Known Member

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    Probably best to make some new work mates.
    Anyone big noting how many properties they own and then given you uneducated advice is probably not worth hanging around :)
     
  20. Perthguy

    Perthguy Well-Known Member

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    Like others have said... not correct. Another issue that hasn't been considered is a low valuation. I inspected a house yesterday that was back on the market after having sold late last year. Settlement did not occur because of a low bank valuation. The buyer would have had to kick in their own funds to settle. They were not prepared to do that so they passed on the deal. In a case where a valuation comes back low, the 20% + job scenario won't get you over the line.

    Even pre-apra changes I have been knocked back for loans. I had loads of equity but not enough serviceability to satisfy the banks. It happens.