Building Portfolio on Average Income, Reality or Illusion?

There is a lot to be said for cash flow positive properties like NRAS. You can scale up on the number you hold and cash now is a lot better than a promise of more cash later.

Basically an asset is something that brings in money and a liability is something that takes out money.

I have seen some people with a lot of properties all in Perth/Pilbara struggle with a sideways (down) market post GFC and it really is a painful process when they are negatively geared to hell and being forced to slowly sell the portfolio down to pay debt.

In terms of being diversified I hold to the belief that the only true diversifier is cash. In the GFC a lot of assets all moved in the same direction.

Boring.

 

Hi Mate, so when some lenders consider existing debt at actual repayments but other lenders look at P&I repayments + 20% over the remaining term of the loan does that constitute as assessing the same way? If all lenders assessed in such a similar way, why does borrowing capacity differ so largely across lenders?

 

Only the CBA assesses serviceability in the way you've described (P&I + 20%).

Most lenders use P&I at an assessment rate between 7%-8%. These lenders are all starting to look very similar in their lending capacity (there is some variance due to the exact assessment rate and a few other policies, but it's minor for most people).

A few of the privately funded lenders use actual rates on pre-existing mortgage which makes them significantly more generous than most lenders.

There has been a major push over the last 18 months to get lenders to have relatively uniform servicing criteria, which has led to most lenders having very average servicing criteria. We won't know if it was worthwhile for a couple of years I suspect.

 

What Peter said....

 

So what you're essentially saying is that all lenders assess applications is just about the same way. If that was the case, there'd be no point in seeing any other lender than your existing bank due to such similarities between assessment. Even if for argument sake, the assessment rate of 7-8% makes minimal difference - what about living expense calculations. What about credit card debt calculations. Then what about rental income. What about bonus income (paid monthly, annually etc). What about self employed, some lenders will use 1 years, some lenders will use two years. What about the way lenders look at the difference between the two years - some use the lower, some use the average.
I think it's very naive to give a blanket like advice that assessment rates are pretty much all the same across lenders and therefore if you're told you can't borrow any more, then you must give up. The question was asking about average income building a portfolio - is it possible, 100%. Everyone's situation is different and ever lender has different policies on how to assess each aspect of one's situation.

 

@Michael Chiel - Peasy didn't say all lenders were the same, only that the mainstream lenders are moving in the same direction. I went out of my way to state that there are lenders with very different assessment strategies than the mainstream lenders.

You need to read my post again.

It is definitely possible to build a large portfolio, I've already stated this in this thread and others. What worked previously may not work today however as there has been an enormous amount of changes over the last 18 months. Investors are going to have to use strategies and lenders that they would never have considered previously.

 

I agree. The investing and lending environment is constantly changing and we need to adapt to suit. Think of the lending environment pre-GFC (lots to low-doc), post-GFC (credit rules tightened) then post APRA changes (serviceability calcs tightened, HEMs etc). This doesn't mean that people have stopped investing, just the finance strategy has changed. What worked pre-GFC would not necessarily work post-GFC. What worked pre-APRA won't necessarily work post-APRA.

 

@Realist35 Ive read the thread a bit and sort of skipped to the end page but yes its definitely possible to start a portfolio on an average income. One thing to watch out for in Queensland is very high building insurance premiums compared to the other states which might hinder the affordability of keeping/making money on the property in Brisbane. I would look at other states before jumping into Brisbane.

 

The big difference is that everything before APRA was market driven. This is regulator driven

For Australian resi mortgage borrowers, the GFC didnt change anything except LVR's at some lenders, and it took 1 day ABN no doc and lo doc as we knew it, out of the market, and replaced both products with medium doc versions of lo doc.

 

Setting aside the few "actuals" lenders , borrowing capacity doesnt differ between lenders anywhere near as much as it used to.

Most assessment rates are within a fairly tight range of each other already. Yes there's some variation, but it's all reasonably closely matched now. This trend will only continue.

Most HEM's are as well. Again, some variations but closely matched. This trend will only continue. may actually worsen/get stricter. ASIC , not APRA are driving this under the guise of responsible lending - and any broker here will tell you that just in the last few months there's been a major uplift in the requirement to scrutinise living expenses. Banks servicing calcs are asking for more detail. Loan app forms are as well, and mortgage aggregators will be required to ramp it up significantly on broker "fact find" documents next year. ASIC are making a very big deal of this with aggregators and banks .

The only real points of difference between most lenders right now is how they treat secondary income, rent and neg gearing ... and the differences arent very significant in may cases- and incrementally all of that is narrowing to a fairly tight range as well...

In the end, there's a 10% speed limit in place for I/O lending, and there's a pair of regulatory agencies who have their teeth right into this, and that sits against a background where because of higher prices, there is more demand for I/O lending than the banks can satisfy without incurring regulatory wrath. This pressure on I/O lending will only increase as existing I/O terms expire and seek a renewed I/O term. So as one lender reaches its speed limit and detunes their calc to discourage volume in I/O lending, that volume migrates to another lender until they reach their limits and detune their calc, at which time the I/O volume migrates to another lender until they reach their limits and detune their calc.

There are only so many times the can can be kicked down the road. and the volume can go from one lender to another before everyone is operating at or near their speed limits all year round. ... Now keep in mind that it's barely over a year since the changes started - and some lenders only seriously started implementing changes in early 2016. Within a year or two, as BASEL IV is implemented, its likely that lender servicing policies will be even closer to indistinguishable than they are now...

In a low wage growth environment, the key to success would appear to be the aggressive removal on non income producing, non deductible debt... thats the best bet for building a reasonable sized portfolio on a modest income.

 

I've just been a reader and not a poster over many years and I credit this (and previous) site and its regular contributors for a tangible difference it's made to my journey. It's the only site I read daily.

The current lending environment and my situation has prompted this post, in particular the below statement from @euro73 .

I am this guy....(nowhere near 60 though) on 80K, 10 properties, 600K each, $490pw each.
Would I be able to borrow 3 Million in today's/tomorrow's lending environment?

 

BandM my call is no.

These are our circumstances:

• Combined income >$280k
• Public servants (me same employer 30 years, wife 10 years)
• 9 IPs/1 PPOR valued at $7.5m accumulated over 16 years, debt about $4.2m
• No dependents
• Private banking client
• Last purchase with ANZ in 2015 in August for $650k on Sunnie Coast

Knocked back this year for reno funds whereas in 2015 it was no problems come back and see us in 2016.

 

such a closet reader... registered pchat more than a year, but a virgin post.... congrats on achieving such a big portfolio...

 

wow that's unexpected. massive income, no dependents, low lvr, excellent employment... ticks all the boxes..

 

Congrats on a great portfolio, hope they're going well for you.

Yep, the great brokers adding their knowledge to this site understand options across the banks in these changing times. When I thought I was at a dead end last year, my broker raised a few options, and we went again.

 

Thats the difference "actuals" v "sensitised" makes.

A quick number crunch indicates you can get @2 Million more... but Ive made some assumptions about total rental income being generated. Still... quite certain you could be doing far more than ANZ are assisting you with/allowing.

 

@euro73 so 300k gross income will allow borrowings of 6 millions assuming healthy yields ie 5%?

 

Depends on other factors... existing liabilities, available deposit sizes etc...


For example, if you were to try and achieve that level of borrowing using that income, and all the loans needed to be above 80% LVR because available deposits were limited - not so simple. You wouild be restricted to lenders using sensitised assessment rates only.

But if you had sufficient deposits available to do a portion of the lending at 90% until you exhausted capacity ( requiring 12% deposit + stamp duty on each deal) and then the remainder at 80% or below ( requiring 20% deposit + stamp duty on each deal) ... yes it's achievable under the circumstances you have proposed, because below 80% LVR you'd be able to utilise lenders who still use "actuals"

You have to manage your available deposits/equity by matching them with a plan - that plan has to use the right lenders in the right order and it may well mean paying LMI... that is the price that may be required to truly get every drop of juice out of your available lemon.

of course, if deposits are no problem,all of this can be achieved at 80% or below... you just need to use lenders with the worst calc first, then 2nd worst, then 3rd worst ...until you are exhausted with them.... then move on to lenders using "actuals"

Remember, qualifying for a loan always requires a suitable security, suitable credit rating/score, and where borrowing capacity is concerned - passing a servicing test and providing evidence of funds to complete (deposit + costs) so it's often available deposits rather than available income that stops people.

 

Thanks for your posts.

In 2015 when we did IP number 9 the ANZ's serviceability test had us come in about $7/annum in the red. Fast forward to 2016 and under their new serviceability test we were >$70/annum in the red. Reality is that we can and did save $40k in 2015-16. We asked the ANZ to review their decision but were rejected again.

We wanted to renovate a townhouse that we purchased in 2000 (for $227k) and lift its value from about $675k to over $800k. Still haven't given up but plans are being delayed.