Borrowing Capacity on Rental Income

Yes, that happens already with the 80% part of the rent. They factor in 20-25% discount to allow for rental related expenses. They then exaggerate your 4.5% IO loan up to 7 .5% P&I to allow for changes there and to further shield themselves.

 

I've been thinking about how investors continue buying these days... Providing the rental income does not make any major difference to improve borrowing capacity in current lending environment. E.g., even if the banks did not cap the rent rate at around 6% to get it to 10% to be able to borrow the same amount of money for next purchase would mean waiting for years and years for the rent to increase.

Equity does not make difference if you can't access it because of poor borrowing capacity. And if the salary does not grow significantly the investor has pretty much hit the wall. Any ways around?

 

Yep - changing strategy.

Developing with one to sell, and selling buy and hold after massive growth for eg in Sydney with a view to develop the next project.

This allows you to reduce debt and go again and is more self sustaining.

Buy and hold will simply be too restrictive now for most people.

 

paying down non deductible debt will help.This debt doesn't earn income so it hurts serviceability more.

Selling longer held IPs and paying down the PPOR debt can also help, especially ones where the yield is low but growth already happened and/or expect to be low.

 

That makes sense @Jess Peletier. Indeed, the simple buy and hold becomes too restrictive these days...

 

Don't forget though to factor in CGT then. The buy-reno-hold (and hold and hold and hold) doesn't need to factor that in (well, until sale). It's different if you're now planning on selling and effectively flipping using light (cosmetic) or heavy (structural) or development.

Wondering how develop-and-hold will fair too - lots of serviceability issues when holding...

 

Do banks still consider annuities/cash bonds as income in their servicing calculators?

From what I've found that used to be an option. Not sure about the current lending environment though.

 

The key to servicing is to pay down debt. Existing debts are the biggest hinderence to being able to borrow money at the moment. Kind of ironic that they'll only let you borrow money if you pay off money you've already borrowed.

Buy - Develop - Sell strategy works well. Develop 2-3 properties, sell one to pay off some of the debt. Reduces the debt has a massive boost on servicing and the cash flow injection from the remaining properties also helps a lot.

Buy - Develop - Hold works to a point. Works well if you've got an already strong income as it makes the new properties look roughly cash flow neutral for borrowing purposes (10% + yield on costs). It probably won't increase your borrowing capacity too much though.

 

So in a debt reduction strategy do the banks treat debt types differently in terms of servicing ?eg car debt vs credit card debt vs ppor mortgage debt vs ip mortgage debt ? Does it matter to them that's it good (tax deductible) debt? I didn't think they took any tax benefits into not account so to the bank surely it's all just debt ? I always wonder about the car loans in particular ..they ask the value and repayments but not what's left to pay - what if you have 3 months to and then have an extra $500 left for servicing ? Or do you have to wait for this to actually happen and is this then regarded as an increase in net income?

 

Different types of debt are treated differently.

Mortgage debt is assessed using various buffers. Lenders may apply negative gearing where appropirate.

Car and personal loans are assessed at actual payment. There's no recognition of good verses bad debt. If you've only got 3 months left to pay, consider paying it off early to improve your servicing.

Credit cards are usually assessed as a monthly outgoing of 2.5% - 3.0% of the limit. It's always considered to be consumer debt.

Of course, if the above debt types are in a company name, the interest would be deductible as it appears in the company tax return. No love for regular PAYG people though.

 

I do think the lenders are somewhat lazy with their 80% rent rule and more needs to be done.

How can the same loading occur for a brand new house and land with no body corporate, no maintenance (should be covered by builder), much less likely vacancy VS an old apartment with huge body Corp fees, maintenance issues and higher vacancy.

I would not imagine it to be that hard to add a few extra drop downs into the calcs to establish this and add loading accordingly.
E.g - Type (house, unit) (Body Corp gets added accordingly)
Age - Maintenance gets added accordingly

And so on.
With APRA changes lenders should be looking at other ways to assist in helping capacity again and blanket rules IMO are not really good enough.

 

The intent of the responses is to highlight that a good set of principles would be to provide a broker with detailed information pertaining to assets and liabilities and they can give you the ballpark figure you seek

 

Thanks that's really informative and helpful - so if I have $30k cash and want to improve serviceability I would pay the car loan off rather than the credit card for example ? That seems counter productive as card interest is generally much higher ?

 

lets not forget the dramatically different household expenditure measures which have also been introduced. All these levers form the lenders responses to curtailing I/O borrowing capacity in order to assist them to meet their 10% speed limits and to satisfy ASIC's responsible lending requirements. Full circle back to.... go talk to a broker

 

Debt reduction. There is no escaping this. Equity will not assist - unless you are self employed and are using lo doc lending. Otherwise , the focus must be debt reduction

It's all well and good to think a strategy where you buy, get some uplift, sell to harvest the uplift to pay down debt and then go again, will get you there .... but selling carries sales costs and CGT costs, and then to re-purchase and repeat requires stamp duty ... you need to be making pretty chunky profits for this strategy to prove effective.... but will that growth be there when the servicing limitations you're experiencing are the same servicing limitations many others are experiencing, or will experience soon enough?

For me, this idea is flawed as it assumes and relies upon great CG in short periods. Can that really be assumed or relied upon? Is it reasonable to believe that CG will continue to just trot along undisturbed, unaffected, doling out high growth in short time frames, when everyone has this very different credit environment to deal with? You may get lucky once or twice, but is it really a reliable strategy that will produce the same outcome over and over again?

By all means, make it part of your approach, but I'd prefer to hedge my bets and accumulate the maximum I can now- to my capacity limits, hold it with no out of pocket costs , while accepting it will likely mature at a slower pace than we have all become used to during the past 2-3 decades when credit was expansive rather than constrained, and then compliment it with aggressive debt reduction, facilitated by the massive tax free surpluses I generate within my portfolio. This way I avoid luck. I get equity with or without CG ( great if I get it, but not essential is the point) and I get improved borrowing capacity because of that- which is the real prize... as it, and only it, is what allows me to grow. All without incurring the costs of constantly selling and re-purchasing to do it - and all without relying on luck.

 

This is why I like NRAS. I can buy and hold and reduce debt, without selling.

 

Be careful what you wish for. No chance that regulators having closer scrutiny of holding expenses would work in your favour.

 

Easy enough to compare the servicing outcomes by eliminating one or the other. Usually the credit card should be the first one to by paid off and cancelled.

 

You'd pay off the credit card first and close it. With credit limits ( not balances) being assessed @ 2.5% - 3% a month, lenders calculate Credit Card debt to be costing you 30%-35% per annum. If your car loan is a lower rate than that, it's less effective targeting it first

the exception to this is where lenders ( of whom there are few) ignore Credit cards if their balances have been paid in full for 3 months in a row - if you were working with one of those lenders, the car loan should go first

Confused yet?

 

Hey Peter,
Care to elaborate on this? I very much value your opinion on this forum and would be keen to hear your thoughts.
Do you believe the blanket 20% costs is a fair system? I appreciate some properties would incur higher costs than the 20% but IMO that is probably fair they do.