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Borrowing Capacity on Rental Income

Discussion in 'Property Finance' started by Undervalued, 14th Jan, 2016.

  1. Undervalued

    Undervalued Member

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    Could the brokers here please confirm my approach to calculating borrowing capacity:

    Weekly rental e.g. $1,000
    @ 80% $800
    Annualised $41,600
    Interest rate applied for serviceability 6%
    Max loan size $693,333

    So what I can expect is banks offering about $700k for any property yielding $1,000 per week, where no additional income is used.

    Is that right?
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Sorry but not even close, this is only a small part of the whole picture. Lenders don't simply look at property in question. Your complete financial profile is required.

    Other things which are considered include (but not limited to):
    * Your personal income and business income.
    * Income from other properties.
    * Debts against other properties.
    * Family structure which indicates cost of living expenses.
    * Credit card limits.
    * Lease expenses (rent you're paying, car lease, etc).
    * Personal loans.
    * HECS liabilities.
    * Any other debts you might have.

    If you want to get a proper understanding of your affordability across multiple lenders, you need to talk directly to a broker and give them a significant amount of information.
     
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  3. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Pete's responded with a great post.

    To further comment - that servicing rate is going to be 7%+ these days.

    Cheers

    Jamie
     
  4. Undervalued

    Undervalued Member

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    Well... fair enough. However, before entering into that conversations it is helpful to have an indication of whether it will work at a ballpark level.

    The intent of my post is to establish what is a good set of principles to work out that ballpark. Not a guarantee for finance.

    So assuming everything external to the additional investment is at worst neutral to existing borrowing capacity, the question I am asking is what difference does a $1 in rental income make to borrowing capacity. (There used to be a good 'sticky' post on Somersoft that talked to this exactly which seems to have disappeared now.)

    I don't think I am a million miles off in my original post, am I? However, the 7+% servicing rate is a good point.
     
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  5. jpcashflow

    jpcashflow Well-Known Member Business Member

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    Hi Undervalued,

    Like the above have mentioned, there is a bit more information required. With so many variables that can occur provide the information to a broker and let them do the work :)
     
  6. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    That rate is generally loaded to existing debt you hold now too - and most banks will covert IO repayments to P&I which further reduces borrowing capacity.....and to make life more exciting....if you're currently paying IO on existing debt, they'll calculate that debt at the remaining P&I term.

    Cheers

    Jamie
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If you want a ball park, you could use a random online calc for one of the lenders. But even then it's a bit of a waste of time b/c where one says no, another will say yes. If you use the 'no' one first, you might not pursue it any further which would be a bit sad.

    Servicing is quite complex due to the differences in lenders, and made even more complex due to the personal circumstances of the borrower, so unless you know which lender you want to use, you really are best off hitting up a broker before spending too much time worrying about a ball park.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    as a very rough guide I just times someone's annual income by 6.

    So someone on $100k could borrow around $600k.

    Extremely rough.
     
  9. tobe

    tobe Well-Known Member

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    Having a rental return of upwards of 10% gross will be neutral to your borrowing capacity. Does that help?

    For instance if you can find a property for $200k that rents for $385 per week and you have another income that 'covers' your living costs and other debt repayments, the rental amount will 'cover' the borrowings of $200k in the banks servicing calculator.
     
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  10. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    .....but then you've got to remember that some lenders will cap the rental yield you can use. It's all fun and games in the world of mortgages :)
     
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  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What about the old 'too rent reliant' line. I haven't heard that in years, but I wonder if this still is used by the lenders.
     
  12. Kegs86

    Kegs86 Active Member

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    Tobe,

    I have a house owing me 100k and will be renting for $260- $280. Will this give me a slight increase in BC?

    Cheers mate
     
  13. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Unfortuantely the info available isn't even remotely enough to give even a 'ball park' estimate.

    In the last 6 months, the rules have changed significantly and attention to detail is everything. It used to be the case where brokers could take some information over the phone and give a 'ball park' estimate that was reasonably reliable. These days I'm getting very reluctant to do this as more often than not, that ball park estimate can get people into trouble.

    As Tobe suggested, the rental yield needs to be at least 10% for the property to even be considered 'neutrally' geared under the lenders assessment criteria and even then there's caveats on this. Borrowing capacity is no longer something that you can go by a rule of thumb or a ball park estimate.
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Definitely is alive and being actively being used as an excuse not to fund with some lenders. I've heard it a few times in the last few months.

    Depends on the lender and in some instances the property location. On balance, the simple answer is yes, a slight increase.
     
  15. tobe

    tobe Well-Known Member

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    $100,000 times 7.5% P&I is 161 pw. 280 rent pw at 80% is $224 so the difference ($61 pw) is what can go toward increasing your borrowing capacity.

    That extra income increases your capacity about $30,000
     
  16. tobe

    tobe Well-Known Member

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    $3000 extra income a year roughly equates to $30k extra. $15ky is $120,000 extra borrowings
    $30k is $210k.
     
  17. Kegs86

    Kegs86 Active Member

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    Cheers Tobe makes sense
     
  18. Kegs86

    Kegs86 Active Member

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    Sorry to be throwing these easy questions at you mate,
    But when I apply for an investment loan for a particular property, do the banks take 80% of the rental for the property that I am looking to purchase? Rental forecasts from a couple of R.E ?

    Cheers Greg
     
  19. tobe

    tobe Well-Known Member

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    Each banks different. Most take 80%. Some will rely on a rental estimate but most will want to see a lease or rental statement or the rental estimate in the banks valuation report.
    As said earlier some cap the rental to 6% yield as well. Most only use normal rentals, not by the room or student or holiday rentals.
     
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  20. Elives

    Elives Well-Known Member

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    is this correct? i thought the bank would take into account rates, body corp, insurances etc.. management fees. meaning the rent minus the 7.5% p&i calc would be wrong as the outgoings buffer would have to be higher?