BROKER ADVICE

Hey guys,

I was chasing some advice from a few of the brokers on here.

I have been speaking to a Broker recently that has given me the advice of changing my current PPOR(which I plan on renting out soon) to interest only in order to free up some cash flow and increase my borrowing capacity for an Investment property.

However, I have been in contact with my bank and they cannot understand how that would increase my borrowing capacity because banks must use P&I repayments when calculating ones borrowing capacity.
They said that they can offer me a 3 year term of interest only, but after the 3 years my repayments will increase(more than the current P&I) to catch up on those 3 years that I wasn't paying principal on the loan.

They basically accused this broker as being a little bit dodgy by not telling me that this would happen..Something about a responsible lending rule etc..

Do I need to change bank or broker!?

Thanks Greg

 

Maybe your broker meant that you will have more cash available.

 

Your broker is correct. IO repayments will improve your cashflow and with many lenders, your borrowing capacity.

Your bank are viewing the world through a pinhole and assuming all your future borrowings will be with them

 

I've had 5 years IO minimum with many 15 years.

Maybe that's their 'rule's for a PPOR but for an IP it is nonsense.

 

My bank is actually as small credit union and I have basically told them that I don't plan on cross securing my next I.P loan..

Do most banks work on this 3 year rule with higher repayments after that??

 

It used to be much better pre-APRA, but now it's pretty much just Liberty and Nab that don't use P&I repayments in your servicing.

But, if servicing is getting tight it can be the difference between servicing and not servicing. Regardless, it's much better for cashflow and can allow you to focus extra cash where you want it rather than paying down deductible loans.

 

This is my current PPOR but I am moving to Melbourne soon and plan to rent it out. The yield will be pretty good but no chance of capital growth in this one horse town.

Maybe I.O seems a bit risky to them as the growth is non existent..

 

It's not a 3 year rule, but the term of the IO. If you have a 30 year loan term, of which 5 years is IO, the P&I payments are higher after the IO period is over b/c you then have to completely repay the loan in 25 years, not 30.

 

Interest only will increase your day to day cash flow (and give you a slight advantage on tax refunds), so from an immediate cash flow perspective, your broker is certainly correct.

From the banks perspective it's another thing. Most lenders assess loan affordability based on the P&I schedule over the amatorisation period after the interest only period has finished. As a result the 'affordability' figures are determined over a 25 year period instead of a 30 year period, thus the outgoing commitment by the banks reasoning is greater and your affordability is thus lower.

In the current regulated lending invironment this is fairly big deal. Loans are being looked at as if what's the worst thing that could possibly happen, rather than what's the worst thing that could reasonably happen. Consideration for investors isn't a factor at all.

 

IO can actually hurt your serviceability as the bank takes the amortised payments over the remaining period ie 25 years instead of 30 as you're not actually reducing the principal in the first 5 years so can actually decrease your borrowing power. Certainly helps with cash flow though.

Edit: whoops, Pete beat me to it.

 

Thanks Jess,
That is pretty much how they explained it to me. I'm not sure If I will keep it for 3 more years but to get me into the property market, It has the equity and can increase my borrowing power.. So maybe I should run with the 3 years I/O and hock it off after that!

Or do I look at refinancing with a new lender??
Cheers Greg

 

Thanks guys

If I have an investment property on I.O and the bank agrees to say 5 years I.O initially but After that 5 year period the I.P has seen good CG, are they generally happy to extend the I.O repayment period because the LVR has decreased??

Cheers Greg

 

Cheers Pete,

I see you are based in Melbourne so I could be in touch soon mate.

Thanks Greg,

 

I wouldn't necessarily assume the broker is doing anything dodgy - if they were that way inclined I'm sure they would have found a reason to refinance your PPOR.

You're likely needing to utilise a lender for the purchase which just loads a % increase on actual repayments, unlike the credit union which will calculate repayments at remaining P&I term @ x% inflated.

 

When the 3 yr IO term expires, you could
a) see if you can extend further - this will rely on your income and the lenders policy, rather than property growth
b) Pay P&I
c) refinance to another lender for a fresh IO term.
d) sell.

 

LVR doesn't really come into play in the way you're thinking.

99% of banks will want to do a re-assessment to extend an IO period and some also limit the time ie 10 or 15 years max so quite a few factors come into play.

 

I doubt your broker is deliberately doing something wrong.

IO repayments can help with certain lenders (Nab group and some of the smaller guys) - but as rightly pointed out, it can also do harm with a lot more who take the remaining P&I term for servicing.

Cheers

Jamie

 

Thanks mate,

This I will be purchasing my first investment property this year and I just want to give myself the best chance of getting into a city market.

I also want to mitigate risk as much as possible also and don't want to be out of my depth with too high a loan.