Credit tap to be turned back on, full strength?

Discussion in 'Property Market Economics' started by Sydlad, 25th Sep, 2020.

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  1. euro73

    euro73 Well-Known Member Business Member

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    APRA. They believe this is a benchmark globally that was the breaking point when the credit crunch was in full swing. Lenders from nations with a DTI above 6 got into big trouble... lenders below 6 did not. At least, that's what I have seen APRA speak about in the past. Remember DTI ratio's are not hard and fast. APRA doesnt actually impose them or police them . Lenders are allowed to go above 6. Its just been recommended as the benchmark and lenders are obviously toeing the line for the most part over recent years..... they have two regulators and a royal commission all over them, after all.

    But as an example, AMP's calculator flashes a little warning if you go above 6 DTI, but it doesnt fail you as long as you have a monthly surplus above $500 and the LVR is below 80. Theoretically it has no DTI limit. But the boffins tend to engineer the calc outcomes to top out in the 7-8 range, typically. I haven't ever seen a scenario above that level where the surplus of $500 has been maintained. But I assume it's possible for a very high earner with little debt . So there are clearly some exceptions.... but if you ran hundreds of scenarios for clients with portfolios like I do, you see patterns... and 6-8 is the cap for most situations at most lenders for most borrowers. Not because it is a real or enforced cap, but because that's just how most calcs are coming out in the wash
     
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  2. albanga

    albanga Well-Known Member

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    Thanks for the detailed response!
    So sounds like as soon as you start to get a few properties that this becomes the limiting factor more than traditional “borrowing capacity” in terms of net surplus.
     
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  3. euro73

    euro73 Well-Known Member Business Member

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    I wouldn't necessarily agree with that proposition, no. The limiting factors are using IO extensively and not paying down debt. Those decisions hurt capacity far more than the number of properties one buys. The number of properties one owns isnt really relevant, of itself. Consider this; a person who earns 100K gross PAYG does one of the following;
    They borrow 800K secured against 10 x 100K properties generating $200 per week rental income each , for a total rental income of 104K and is able to pay P&I from day and start paying down debt OR
    They borrow 800K secured against 4 x 250K properties generating $300 per week rental income each for a total rental income of 62.4K and is able to pay P7I from day 1 and start paying down debt OR
    They borrow 800K secured against 2 x 500K properties generating 450 per week rental income each for a total rental income of 46.8K and cannot afford P&I without topping repayments up themselves OR
    They borrow 800K secured against 1 x 1 million property generating 750 per week for a total rental income of 39K and cannot afford P&I without topping repayments up themselves
    In each scenario, 800K has been borrowed, but in the first 2 examples the person is able to pay P&I from day 1 without needing to top up from their own pocket. Which situation sees them running out of borrowing capacity first, and which scenario sees them imrpove their borrowing capacity fastest? More properties, or less? Debt reduction by paying P&I or no debt reduction because they cant afford it. It's yield that matters, and its debt reduction that matters ..... not the number of properties you buy ;) But the number of properties you can buy in future definitely depends on the decisions you make early on !!!!
     
    Last edited: 27th Sep, 2020
  4. BunnyXiao

    BunnyXiao Well-Known Member

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    An incredible wealth of information here so generously shared and explained. Thank you
     
  5. Beano

    Beano Well-Known Member

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    When you have a few properties you don't really need the bank as the surpluses and fully paid off loans are usually large enough to buy a average property unencumbered every few months .
     
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