CBA - Topping Up Existing Loan

Our current loan is with CBA for $472k and our property value is $850k. We would like to top up our loan by $100k but the lender at CBA has turned around and told us that we are unable to do that because they believe we won't be able to service the loan. The reason for this assessment is that they're checking our ability to service the loan at 7.35% rather than our existing rate because the current interest rates are at an all time low and their lending criteria has gotten stricter. I've never heard of anything like this before, especially as two years ago CBA were throwing money at us to increase our loan. I am confused as to why such a high rate is being used when our current variable rate is 4.35%.

Has anyone been in this situation before and overcome it? Do we need to look at switching to a different bank?

 

This is how it works. To be able to borrow money you have to demonstrate that you can service the loans and the banks have criteria you must meet. Rates might rise at some point and so the bank's build in a buffer.

But CBA is rather conservative as so another lender may lend you more.

 

CBA have made several tweaks over the last year making max borrowing less than previous, as have most lenders, to their servicing calcs such as increasing basic living costs and only accepting 80% of overtime and allowances where as previous it was 100% of annualised income.

Applying stated living costs is also the norm now as before it was default to the HPI (Henderson poverty index) but due to regulator intervention this is no longer acceptable which does make sense.

 

Two years ago is a world away from where we are now residential property finance. As is known to some on this forum, in mid 2015 APRA stepped in and forced banks to tighten their lending criteria to curb investment lending. This was done to reduce the banks' exposure and increase capital.
So in this new lending enviromment such controls are fairly standard amongst the regulated lenders. You will find the other major lenders will have similar assessment rates.

You should speak to a broker to assess your situation and you may find you might be able do what you propose with an alternative lender.

 

There are several lenders whose max lending is more generous than CBA so @York is correct. Try a different lender via an IP savy broker.

 

All lenders use a 'buffer' of some sort when determining your borrowing capacity, over 7% is quite common. It can even be argued that the CBAs overall methodology is generous. There are others who are more generous in certain circumstances however.

Rates won't stay this low for ever. Assessing based on higher interest rates is only prudent.

 

You might need to change lenders - depending on whether you have other property or not will determine which lender will be best, but there is most likely a better option for you out there.

Is the equity for a new IP? If so, you may be able to get it done with CBA by including the new purchase in the calc - this allows negative gearing to be used, and also the projected rental income to be included.

As others have said, chat to a good broker to find out your options.

 

Thanks everyone. @Rolf Latham is our broker so I will chat to him. Our loan comes off fixed early October so I have some time. I knew the rates had tightened up but I was not anticipating it to tighten up so much. I actually needed to borrow money to upgrade my car and really needed only $50,000 between car and personal expenses needing to be covered but thought if I had extra it wouldn't hurt. CBA have essentially told me the only way we could maybe even get $10k is if I reduce my expenses by $500 per month and the lady I spoke to suggested taking my daughter out of childcare and getting hubby to look after her as his business didn't generate a high enough net profit to warrant him working which I thought was really rude.

 

Ha! Everyone knows net profit is not actual profit.
But that said, from a servicing perspective it can put a spanner in the works unfortunately. Has he done his 15-16 tax yet? If not, see if your accountant can 'not' claim every expense to make profit higher.

 

Heya, you may be able to do this with a bit of finance structuring magic (hopefully!)

This is a bit quirky, but if this has been structured it via their top up streamlined assessment their credit assessor will assess the entire debt at 7.25% P&I repayment. On a $572k loan, that is a $4,134 p/m expense listed on your borrowing capacity.

I like their top up process - much quicker and easier, but their credit policy is marginally different and that can make all the difference.

If however, you submit the same deal as a new loan instead of a top up of an existing loan, than the will assess your existing $472,000 at the current interest rate, P/I over 25 years (likely) and add 20% on top of that. They will assess the $100,000 at the higher assessment rate of 7.25% P/I.

Under this approach the expense on their calculator is:

• $2,557 * 1.20 (20%) = $3,068 PLUS
• $100,000 @ 7.5% P/I over 25 years = $722
• Total = $3,790.

The difference here to your monthly surplus is about $344 by simply restructuring the same deal. The numbers may vary slightly, but doing it as a separate split on a new loan is going to be marginally better servicing wise than doing it via their top up process most of the time.

This may be the difference between passing and failing servicing. It still may not service, but thats the equivalent of wiping a $12k credit card of your application (without actually doing anything at all).

Also be sure to put in a pricing request too, you can have all your loans repriced with that cash out and you may get yourself a decent saving too.

Cheers,
Redom