Financially comfortable but can't get more finance and can't even refinance

Join the ever growing club my friend

 

tbh i look at you, even during good times, i struggle to see how you can borrow more in a "normal" lending criteria,

you are already 75% leveraged and your looking to borrow more ?now in the current market your equity is probably reduced,

you said you have 7 properties, any of them paid off/significantly paid off or not on IO ? and from a perspective of concentrated risk, without looking at the range of property price and location your as concentrated as it gets.

 

The way I read this is that you have a $6mil portfolio and $4.5mil of debt. (Based on $1.5mil equity and 75% LVR).

Your income at $200k and assuming a 3.75% net return (to give you a neutral cash flow) gives an additional $250k of rental income.

Taking the banks 8% calc (excluding P&i) you have will have $360k interest. Leaving $90k left over to cover all other expenses including ‘P’ on $4.5mil.
I’m not suprised they said thanks but no thanks.

And TBH I’m not sure I would want to be in your position. I don’t see a lot of fat in the system for when interest rates rise.

Apologies if any of my calcs are incorrect.

Blacky

 

What would Nathan Birch's position be right now???

 

You're using 8% as if it's an actual figure now, which it isn't. The 'fat' is built in to the servicing calcs already so if rates went up to 8% OP could still afford to hold his portfolio, even on P&I as the bank calcs factor in the repayments over the remaining P&I term. You're not considering that by the time the rates increase that much there are other possible factors, wage increase, rental increases, debt reduction by that time, you're not considering negative gearing benefits. Many factors not considered in your calcs.

 

Also, people view debt differently to banks.

One example that educated me a few years ago:

I had a loan on an IP for $x and an offset with $x. That is, the offset was fully chocked.

I saw my debt on this IP as zero; the bank saw it as $x. When I debated this with the bank, their view was that I could withdraw the $x from the offset in a moment. I told them to check their records - the offset has been fully chocked for 10 years.

Made no difference. They said I could transfer the $x from the offset to the loan and then they would view the debt as zero (like I was doing).

 

Just curious, how much one can borrow on 200k salary + 250k rental income in current environment?

 

Impossible to answer just based on those two figures unless you assume no other debts at all, no other expenses, living expenses less than HEM etc.

 

single, minimal expense no other debts.

 

We tried to model something like this out a little while ago when it became clear some of the changes to serviceability had settled in.

This was based on a couple, income split 50/50, 80% LVRs, renting cheaply (400 per week from memory).

 

@TheSackedWiggle - good question. The concept of DTI's can be a bit confusing.

Essentially there are different methodologies to calculate ones serviceability.

1. Net Surplus income: This is what we use in Australia, where income & expenses are used line by line, to get a net surplus figure. This net surplus figure is used to lend. The interest rate of the day influences the assessment rate. The assessment rate is whats used to extrapolate the net surplus figure into a borrowing power figure. Our assessment rate is currently at around 7%, with a floor set here (can't go lower for now). If rates rise 2-3% over the years, than the assessment rate will rise and then borrowing power figures will crunch big time. If you an extrapolate a net surplus figure at a lower assessment rate, borrowing power falls (dramatically too).

2. Debt to Income ratios: This is an alternative methodology to calculate someones borrowing power. Its beauty is its simplicity. It doesn't take into account expenses very well, as its an income focussed serviceability metric.

Now we use the Net Surplus Income methodology. Based on APRA calculators, this methodology really only allows for a Debt to Income ratio of around 6-7. It is very hard to get above 7 and probably impossible to get to 8. This is because the floor assessment rate, extrapolated out, gets you to a total debt to income ratio of around 6-7 max. To get a higher debt to income ratio, the net surplus figure usually turns negative. I.e. you have a servicing fail as your debt gets bigger.

For example, using the chart above:

• A $300k gross household, earning a 6% yield @ an 80% LVR & low expenses, gets a max borrowing capacity of around $3.75mill. This is a $4.687m portfolio (@ 80%), generating $280K in rental income.
• The total income here is around $580k.
• If we adopted a DTI calculation of 6-7, this allows for a borrowing power of around $3.5-4million.
• Notice that Australia's Net Surplus method produces the exact same result (3.75mill).

In short, DTI ratios ON TOP of our existing methodologies, are relatively meaningless & as Rolf put it, 'fluff'.

 

thanks @Redom , yet another excellent post.

 

have you looked at lo doc products???


This may help

Great News if you are Stuck

 

i know that.. im offset as well. so that i have the cash ready to use anytime i want, but having said that, in general debt is debt if u know what i mean. he didnt provide details hence. and in this instance borrowing from a financial institute their view of debt is everything & our view of debt is in reality, as some would put it. "fluff".

 

I prefer to call the bank’s view as “borrowing reality” and my view “my practical/real reality”.

Better than the term “fluff” .

 

Some quick estimates ....

* If you have $4.5M in debt and assuming no rate increases (average rate 4.50% ish) but rolling over to P&I with 25 years term then your repayments are going to be circa $25,600 / month.

* As above with 7.25% pa = $32,500

* My guesstimate of net income after tax = $32,000.

* Add in living costs on that salary at least $4000.

= No shortfall on actual rates but at assessment rates short a few grand a month.

Have your brokers tried Resimac? Chance it could service and rates 4.29% for IO.

 

I use that credit card to buy IPs but I pay it off each month

 

What are the areas of these 7 properties and loans remaining on each and years left before they become PI? Have you factored in having to sell some of these in case they cannot be refinanced?

 

This is really the only solution unless you want to sell up , clear the decks (and the debt) and start over , replacing your existing properties with cheaper ones. You’ll still max out at around the same amount of debt give or take - but you may be able to purchase more than 7 properties ....

If that’s not something you want to do - you need to increase income or reduce debt if you want to continue to borrow ... If the tax Effectiveness of migrating to P&I is less than optimal, that’s just how it is . If your hip pocket experience (what you actually spend) doesn’t marry up with the banks view of things ( what they deem you to spend) that’s just how it is . It’s the same for Everyone . It’s why Sydney and Melbourne have started sliding and investors have all but disappeared from most auctions most weekends in both cities . It’s also why less expensive locations requiring much smaller loans are now best placed for growth .

APRA wants a significant migration back to P&I and they want people capped at 6-7 x income (give or take) and they are engineering it through regulation. That’s the beginning and end of the argument really. As @Redom has demonstrated , regulatory changes ensure that today’s servicing calculators deliver outcomes that are essentially 6-7 x income - even if Debt to income ratios aren’t “officially” being prescribed by regulators or used by lenders. They are certainly being “unofficially “ engineered by the prescription of mandatory assessment rates and ever increasing HEMs, and the results are essentially the same . The semantics dont really matter . You really just gotta pay down debt or increase income significantly - or both.