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Diversified Lending Structure (how to maximise your borrowing capacity)

Discussion in 'Property Finance' started by Corey Batt, 10th Jun, 2016.

  1. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Diversified Lending Structure

    It may be well known by a lot of forum members – but the average investor is not aware that they can potentially increase their long term borrowing capacity by over 100% by utilising a diversified lending structure. This is a common discussion I have with first time investors, which isn’t talked about in mainstream media and leaves many ‘direct to branch’ investors with portfolios which are limited by poor structuring from day 1.

    It’s quite simple in understanding – but requiring finesse on the part of your broker to achieve. By carefully considering your long term investment plan, lender selection can be used to play lending policy against the various lenders, to maximise the borrowing potential far beyond what any one lender would allow. This isn’t just a case of just using multiple lenders, but using the right lenders at the exact right time. Through doing this you can grow you capacity by 1.9-2.5x what you would achieve with any one lender. Here’s how it works:

    Scenario: Family with two children, existing home with mortgage

    This scenario is stripped down to the basics – it will not comment on deposit releases, product types etc. This is purely a borrowing capacity experiment which will highlight the difference between using any one lender vs using a strategic mix of lenders to your benefit. The parameters:

    • Couple, with one partner working fulltime at $75,000, other part time at $40,000 per annum.
    • Two Children
    • An existing mortgage for their residence of $400,000, principal and interest payments, 4.5% interest rate
    • Credit Card of $6,000
    • No other debts.
    • Living expenses of $2,500 per month (as this is below the average lender estimate the lender will adopt their higher figure for a couple with two dependent children)
    • Purchases are assumed at a 5% yield, 400k or less purchase price (400k is used unless the lender has insufficient borrowing capacity, in which case the lesser figure is used)
    Here’s how that scenario plays out across a sample of some of the largest lenders in the market commonly used by investors:

    [​IMG]


    As you will see, most of the lenders are within 5-10% of each other in terms of borrowing capacity – within exception to Lender B which is significantly lower than all other lenders. A lot of the general public do not realise this variance exists between lenders and their policy, which in turn affects investors ability to grow their portfolios.

    By using a single lender, should the borrower pick the highest of lenders available by a stroke of luck – they could purchase a single $400,000 investment property, and still have a remaining borrowing capacity of $174,000 before their borrowing capacity is exhausted. (lender C)

    As an alternative, through ordering the use of lenders – the same couple can use multiple lenders to extend their capacity far beyond any one lender’s capacity. Here is an example of the same couple, using strategic lending to grow their capacity further:

    [​IMG]

    Lender 1:

    • Receives the primary residence’s loan of $400,000
    • Purchase of investment property, $400,000 debt

    Lender 2:

    • Purchase of investment property with debt at $325,000

    Lender 3:

    • Purchase of investment property with debt at $450,000

    Total investment lending: $1,175,000

    Total Increase from ‘single lender’ scenario: 104.52% increase in capacity

    This is a simplified example, when in reality a good investment focused broker will also weigh up interest only policy, cash out policy, cost effectiveness amongst other many other factors dependent on the individual borrowers scenario and needs - but the fundamental principle remains that through using the right lenders at the right stage of your portfolio growth, you can maximise your potential to borrow.

    What Does This Mean For Me?

    Through a strategic lending structure you can significantly increase your borrowing capacity than being reliant on any one specific lender. This involves careful long term planning – focusing on lenders which provide the best short, medium and long term outcomes, not RATE.

    There are also ancillary benefits from structuring in this manner, including the non-centralisation of debt reducing your risk from any one lender restricting your ability to access equity or borrow further.

    Consolidation Phase

    When investing, I would argue there are three main phases: Growth (buying properties), Consolidation (peak of investing, reviewing the portfolio and how to retire from there) and Retirement (peak realisation of investment, living off rent, selling properties etc).

    Whilst growing the portfolio this diversified structure will allow investors to significantly increase their borrowing potential – whilst sometimes not at the most competitive rate. This justified during the growth period as the benefits of growing the portfolio.

    When you do get to a peak size of your portfolio the ‘consolidation phase’ of your portfolio can commence, where by the entirety of the debt can be considered holistically as to whether there is any capacity to restructure debt for cost savings, increasing the portfolio cash flow position. This may allow debt reduction to accelerate or bring forward a position where you can retire from rent – in any case mitigating costs at this point is a prudent measure. It’s important to only do this once the likelihood of wanting to continue expanding your portfolio is unlikely, as a restructure of debts for cost saving may unravel the ability to continue investing through equity releases etc.
     
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  2. albanga

    albanga Well-Known Member

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    Great post @Corey Batt
    I would be interested to know, do you reccommend an anchor lender for your Clients PPOR? From my couple of years on here it appears ANZ and CBA are the best choices.

    Secondly, how hard would it be to get someone out of a bad lender setup? For example a person is capped out at 3 properties due to bad lender selection. What issues would they face with refinancing to fix the problem.
     
  3. wombat777

    wombat777 Well-Known Member Premium Member

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    Great question! I'll need to do something in about two years time when the fixed period on my first investment loan expires. I have finance for my second IP but will have difficulty meeting serviceability criteria for a 3rd IP. A big-ish PPOR loan doesn't help. In the meantime I'm going to work on strategies to grow available capital and share income.

    Edit - another strategy would be to pay down some PPOR debt from cash in my offset accounts, whilst ensuring some buffers are retained
     
    Last edited: 10th Jun, 2016
  4. devank

    devank Look, lets just get on with this, ok? Premium Member

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    "As an alternative, through ordering the use of lenders – the same couple can use multiple lenders to extend their capacity far beyond any one lender’s capacity. Here is an example of the same couple, ..."
    That example is not very clear to me. I'm not sure how lenders 1 to 3 tie with lender A to D.

    My limited learnt knowledge through this forum says, use up stingy banks like ANZ first. Then move to more generous banks like NAB.
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Gotta Butt in..............

    Sell and start again is the end advice some times,especially since the days of the Aprahensive reign

    ta

    rolf
     
  6. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Good discussion questions.

    In terms of 'anchor' lenders - in general we will use specific lenders who will enable investors to utilise their PPOR to push toward their investments goals - generally debt on PPOR's will reduce over time and equity positions increase, so it's important to ensure the lender has a strong cash out policy AND servicing position so that even in later game investing, there is still strong serviceability evident to keep releasing equity for future purchases.

    With 'fixing' poor structures, the earlier in the investing journey generally the easier it is to resolve. The challenge is that if it isn't nipped in the bud, the lending position post APRA can be so constrained that you can only marginally shuffle around the lending, but not actually extend all that much further - it often reminds me of a game of checkers when one side is down to their last pieces shuffling around to avoid defeat.

    The lenders between the first and second calculations aren't necessarily all the same - the lender choices were intentionally not identifiable as it's common to have readers to take any advice on the forums as relevent to their exact specific circumstances, losing all of the fine detail which makes their scenario unique. It all comes down to the concept that considering lending policy as interrelated and part of a greater structure as important, than just finding whatever favoured brand to keep lending.

    As per stingy to generous - that is true to a limited degree, but in reality is a quick way to leave yourself in a hurt position. Consider it from a logical position, the first purchases you make will likely be the first properties that you release equity from in the mid-stage of your investment journey. If you use the specifically stingy lenders initially - what happens when you want to release equity for the follow up purchases? You don't service. This leaves you in a position where you either have equity which can no longer be released OR have to refinance to a more suitable lender who will allow the equity to be released, and in turn forfeit any LMI paid to date (which is often paid for initial purchases).

    A more considered long term strategy is to actually use a mid level lender for the initial purchases at a minimum, protecting the serviceability position enough to enable those first round equity releases and then enable the portfolio to leverage to the next stage. As always, every scenario is different and the tweaks to strategy can lead to vastly different lender selection and advice. :)
     
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  7. devank

    devank Look, lets just get on with this, ok? Premium Member

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    Thank you Corey. You are awesome :)
     
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  8. albanga

    albanga Well-Known Member

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    Thanks @Corey Batt!

    That said I still don't fully understand the restraints of getting out of the mess and I'm sure most other non brokers don't either.

    I appreciate everyone's circumstances are different but say a general scenario;

    PPOR with ING (All the comments would indicate this lender has horrible servicing)

    IP1 with Bankwest (All the comments would indicate this lender is horrible for investors)

    IP2 with ANZ (All the comments would indicate this would be a better anchor lender)

    IP3 with ME BANK (Have not read much but say they were chosen for cheap rates).

    This person has now hit there servicing wall and is stuck. What I don't understand is why they could not refinance?
    Starting with PPOR and then working through the list.
     
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  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    They could easily refinance - assuming they had the income.

    I tend to go for rate mainly because people are so price sensitive. ING are crap for releasing equity for example, but they are good on rate so someone starting out may start out on ING and wait a year or so and then consider the value of the house. They then have a choice of lenders if there is enough equity to tap into - moving costs about $400. They might even be able to get a rebate if they are lucky.
     
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  10. Greyghost

    Greyghost Well-Known Member

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    Informative and structured post. Thank you.
    However I must scrutinise and call it out.
    This thread is just fluff......
    It is a worm on a hook to get investors/ lurkers to pm/contact you to seek out further information...

    There is no real content to this post and I don't think it adds any value. Most already know that by structuring your fincances and financiers correctly you can maximise your capacity and portfolio size.

    We understand that everyone's circumstances are different etc ect etc but finance is a formula and relationship business.
    Therefore if picking up a client with decent servicing and a PPR with good equity and a plan to build 3-5 property portfolio maximising their servicing, there would be a general formula of what lenders to approach first and second and so on.

    But it is in your best interests to not tell the members on here that information because you may miss out on catching the fish..

    Your running a business, I get that, but it's insulting to come on here as a finance professional and just dangle the carrot in front of members faces - or not give any substance to your post..

    How about post the general order of what lenders you would approach, why in that order, how is there servicing calc different from the others, what benefit does that have in moving to the next lender etc etc.

    I apologise for being blunt, but if you are creating a thread to dazzle the members in relation lender structuring but not talking about which lenders and what products and why, what is this thread about? Nothing but what you can offer should a member contact you.

    Rant over. Others may crucify me now, but I speak in the best interest of the general community.
     
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  11. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    It's a case of seeing the forest for the trees @Greyghost. The value to be derived isn't to have an 'ingredients list' of lenders and to merely work through these, but instead to understand the concept of inter-related policy use of lenders. As someone who does sit down with new investors every day - this is a foreign concept which has to be explained every time.

    As per above, I've deliberately avoided speaking about specific lenders, as every single scenario is different - the combination mix can change completely, dependent on factors including:

    • self employed vs PAYG
    • Self Employed tax return variances
    • Casual vs Part Time Vs Full time
    • Salaried vs bonus
    • Time in employment
    • Property type
    • Development potential
    • Personal names for purchase vs discretionary trust vs unit trust
    • Property yield
    • If a renovation project, uninhabitable, damaged
    That's just a few variables which can completely remove/add different lenders to the mix.

    This isn't about having a recipe which doesn't alter with each client, or even tweak minorly - this is about specific advice for specific needs. Otherwise investment focused brokers would just write a simple calculator to spit out a structure and spend 90% of our time on holidays.

    Hope this helps you, alternatively :):
     
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  12. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    The issue is that the lenders they should have used will no longer borrow to them, so the only lenders which they may be able to move to are higher serviceability lenders.

    So they move to higher serviceability lenders, exhausting these lenders capacities - and still no purchase has been made, leaving the borrower in the same position (maybe with some equity released though) - but with no capacity to actual complete finance for a purchase. Any LMI previously paid also would have been forfeited, which over three properties could be 10's of thousands.

    The idea of restructuring later has two main issues: cost and serviceability. If serviceability isn't evident, only minor shuffling can be achieved which will still not aleviate the long term issues. Cost is a minor issue if all purchases were made at 80% from day 1, but a dramatic issue if LMI was paid across all properties. So if you've got a high income and paid no LMI a restructure can be a minor bump in the road, whereas if you have a low income and paid LMI it can be game over.
     
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  13. York

    York Finance Broker Business Member

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    I think the purpose of the post was to inform people who may not know that taking a strategic approach to borrowing money can get you further. As he mentioned, many members will already know this. But, there will also be members who do not.
    The theory behind structuring lenders is that you can maximize their willingness to lend to you by using the right lender at the right time based on your individual situation at a particular point in time. Naming lenders in a particular order isn't very helpful in assisting investors as firstly, lenders change their policy. So a lender which could be the first to use now may not be the best or even possible option in 3 months. Secondly, as you mentioned everyone's scenario is different. It would seem as if we can take a general approach but this is difficult. There are numerous things that lenders look at before they give the green light on an application. Often brokers will say 'It depends on your circumstances' and some may roll their eyes. But it is indeed the reality.
     
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  14. S0805

    S0805 Well-Known Member

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    Corey, agree with your post and understand what you are talking about. However at this stage (especially post APRA) how confident are you as a broker to put your clients on one of this 'anchor' lender and be confident that down the track 3-4 yrs later lender you've selected will meet your client's needs. Are you thinking that only majors will meet this 'anchor' requirement...Currently, most lenders (including majors) are changing their servicing/policies much frequent now.....aren't they?

    I've got ppor & ip with one of the major and more than 20% equity in it, but due to serviceability changes they are not willing to lend me at this stage funnily other major do.... my broker (back then) I think had right intentions and put me to one of the majors assuming they'll serve me well....but not the case now. I assume there will be lot of refinancing happening in next few years till things settle down.

    thoughts!!!!
     
  15. Greyghost

    Greyghost Well-Known Member

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    Anyone but Taylor Swift! My Mrs has done some Guantanamo Bay type torture on me making me listen to her on road trips over the past 2 years....
     
  16. Redom

    Redom Mortgage Broker Business Member

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    Great post @Corey Batt.

    Dealing day to day with customers, this type of conceptual information does serve to benefit the consumers as a whole. There are indeed plenty who'll know this and have read this before across these forums, but its a great modelling of the current scenario.

    A few considerations to note for the general community:

    1. The size of the multiplier to grow from a structured lending structure is far smaller in 2016 than it was in 2015. I wrote a similar post about a year ago on this forum and SS where the same impact was modelled out with individual lender policies to a point far greater than a 1.9-2.5X multiplier. This change creates interactions well worth considering for some investors (particularly for those past the 2.5X multiplier from the previous environment).

    2. As someone moves to their absolute maximum (near the 2.5X) impact and begins using lenders with far greater capacities, the ability to release equity from their initial foundation lenders becomes more limited. By utilising the right mix of lenders early (avoiding the incredibly stingy and operating with the mix of medium tier servicing, good cash out, etc that you mentioned) - investors can push this point out further, but there will indeed be a cross over point where equity releases may no longer be possible as the investing accumulation phase rolls past a certain point.

    3. An environment where lender policy changes are becoming the norm, there is a degree of uncertainty to a structured path. As a consumer, you definitely benefit from having a broker with an eye on the longer game (like Corey obviously has) - but brokers don't control the environment. A few examples of this would be Westpac. They've oscillated from a mid tier suitable early foundation lender, to one of the most stingiest on the market and now back to a suitable accumulation phase lender once again with their mix of policy and serviceability.

    While the strategic brokers can have one eye on the market level direction, its near impossible to accurately predict what each lender will do with a change in environmental circumstances. This obviously creates some uncertainty.

    Cheers,
    Redom
     
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  17. MTR

    MTR Well-Known Member Premium Member

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    Greyghost

    This forum in part survives due to business members, they can spruik till the cows come home, wont bother me one bit. If they provide a good service great then its a win for forum members.

    what I found very interesting was when I started a thread on RAMS lo doc loans for those who were struggling to service debt, some business forum members became very defensive, and not at all helpful to forum members IMO.



    MTR:)
     
    Last edited: 11th Jun, 2016
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  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you are referring to me MTR, I was merely pointing out a gross error on your part, and not bagging the RAMS product at all - it is very good and worth considering.

    If you weren't referring to me, then yes, those business bastards are very defensive.
     
  19. MTR

    MTR Well-Known Member Premium Member

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    LOL...... those business bastards... are very defensive.
     
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  20. MTR

    MTR Well-Known Member Premium Member

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    Agreed.

    This is a timely thread and really its all about strategizing.

    ...... so back to Finance and I will add also most important factor is your Mortgage Broker.... and I have had a few excellent MB.

    What I have found is that sometimes you can outgrow your broker for whatever reason.

    There is no rule saying you can only use one mortgage broker, I have a number of brokers I use, because their expertise varies.

    Not pooing pooing any brokers on this forum, however I am stating that keep an open mind because after all its always about who can source finance and you don't know what you don't know, that's up to you to find out


    MTR:)
     
    Last edited: 11th Jun, 2016
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