Cashflow positive property serviceability

I bought a property 2 years ago on Brisbane. I used a large deposit meaning it is slightly net cashflow positive. At that time the 300k loan was the extent of my borrowing capacity which was based on a 55k income. This has increased to about 65k.

From this point I'd like to use the equity to buy another property. I have 2 question s:

1.Can I find a lender who will appreciate the cashflow positive IP and allow me to borrow again?

2.With my low income, would it be wise to aim for high yield properties rather than growth?

Thanks

 

How much equity do you actually have? Your equity would be somewhere between the $300k and 80% of the value of the property/

You might not have enough to equity and conversely by pulling out equity you increase the size of the loan which reduces it's ability to be cashflow positive and may restrict you from gettiing another loan as your income increase whilst nice might not generate a lot in terms of serviceability.

 

I have about 450k in equity.

I guess my question is, since the IP is taking no money out of my pocket, am I able to borrow more money if I can clearly cover the repayments between collected rent from the 2 properties with my income to cove the shortfall on IP 2. As opposed to the bank feeling uncomfortable with me holding more debt on a modest income.

 

The bank doesnt necessarily take your actual payments as what you can afford.

Go talk to a good mortgage broker.

 

In short, no, mainly because Lenders only use 80% of rental income and apply buffers to existing debt/repayments
However, some lenders are far more generous with serviceability than others.
If you really want to know what you can afford to borrow you would be best to speak to a decent mortgage broker who can check serviceability with some of those 'more generous' lenders, otherwise you're just guessing/assuming.

 

Hypothetically, If my financial situation was identical to how it was when I was approved for the initial 300k loan. But this time I have 300k debt, 200k extra equity, but my cashflow incomings and outgoings are essentially the same as before.

Will all lenders hesitate to increase my debt to income ratio?

 

equity is not relevant for serviceability. Lender serviceability has likely tightened up since you applied too.

Positive cash flow will help serviceability but not as much as people think.

 

equity is not relevant for serviceability. Lender serviceability has likely tightened up since you applied too.

Positive cash flow will help serviceability but not as much as people think.

 

Agree 100% it is a huge misconception.

There are very very few instances where it'll line up where you borrow more money and it increases your borrowing capacity. Since the buffer went to 3% I've seen zero examples of this.

 

It used to be the case that cashflow positive properties helped with serviceability. While it's not as great as it used to be, my take on it is that if you are on a low income, it won't hurt to offset the extra income, no matter how small & inconsequential it is.

 

Thats not what a senior person at BoM told me. It was very relevant and an important factor. When I asked for a bridging loan. He told me because I have plenty of equity I can not only get a new loan I could borrow 140% of the value of the new security and that I didnt need to sell a property, which would have reduced service ability any way because of reduced cash flow .

 

To give you an idea on the point of when a lender deems a property to be servicing itself, I've done the math that indicates that you need a rental yield of about 12% against the debt.

So if you've got a a loan of $300k, you need to be getting $36,000 rental income per year, or $690 per week.

 

It's possibly you've misinterpreted what you've been told, but often the banks will tell you what they think you want to hear just to in your business.

Bridging finance requires you to be able to service the end debt after you sell the initial property. Equity helps in this case because when you sell, they'll use the proceeds of the sale to pay down the debt, plus any accumulated interest.

Whilst the BoM has a reasonably open ended bridging finance policy, I can assure you that eventually they will require you to sell the property. I am familiar with the BoM policy on this.

 

As long as the total LVR of the whole portfolio is 80% of the property values, a positive cashflow rental property will not reduce borrowing power, correct?

If the bank cut 80% of rental income, 80% of the rental income is still more than enough to cover for rental expenses, this property will not reduce borrowing power then?

TIA

 

When i was going through borrowing capacity with my loans person for an IP a few years ago, the amount of rent i'd receive seemed close to irrelevant in terms of how much they'd loan me. But i can't speak of other people. And in my case it was whether it was about $300 or $500 a week in rent, and it really made no difference to them. But again, just my one example.

 

No, not even close.

Cashflow positive is a tax definition, or perhaps a personal definition. It usually asks the question is income greater than expenses?

Borrowing power is a complex equation that includes risk management allowances, as definied by the lender & regulatory bodies. It assumes that everything that could possibly go wrong will, all at the same time.

There is a huge gap between the two.

Right now with investment P&I rates around 6.7%, you need a yield of about 14.6% on the debt to consider a property cashflow neutral. About 15.2% if the loan is interest only. I think everyone would like to know where a property with an 80% lend can acheive this.

The reality is that rental income has very little influence on the banks borrowing power calculations.

 

no

 

As @Peter_Tersteeg has outlined, when the shaded rental income and assessment rate buffers are factored in, you need yields in the 14-15% range to be considered neutral for serviceability .

Just focus on using whatever surplus cash flow you are generating right now, to pay down debt a little faster. The Stage 3 tax cuts are coming in July, and there appears to be an increasing probability of at least some modest RBA reductions at some point in the next 6-12 months. So those two things will combine to improve your serviceability position. Whether it's enough of an improvement to be able to harvest available equity and add to your portfolio is not going to be decided here though. You really need to engage a broker and have them run numbers for you...I would suggest it's best to do that after July 1 when servicing calcs are updated for Stage 3.

#SPARTA.