FIRE and lending limit

Disclaimer: I'm not there yet.

I do wonder though, for those investing in subdivideable properties, how can you realise the value of the subdivision while not employed?

My understanding is

A. banks do a credit check before approving changes to title
B. you can't refinance and access equity created unless you can get a loan

 

If you're not generating enough income, are you can't qualify for any residential related finance. You're stuck with what you've got.

 

to get the titles issued the mortgagee needs to consent but this doesn't necessarily mean credit checks or reapplying for loans, a substitution of mortgage might do the trick.

'accessing equity' is a bad phrase to use perhaps. It is just borrowing more money and if you cannot qualify you cannot borrow

 

Worth clarifying perhaps we are talking about cash flow positive properties, so there would be (rental) income, dividend income - but no PAYG.

So the question is, knowing subdivision may be on the cards in 10-20yrs time, is there a way to structure a portfolio to be 'FIRE-proof'? As leverage is a big part of property investment.

 

Interesting. I guess a broker would be able to advise on 'low touch' vs. 'high touch' lenders? With the residual risk being an unforeseen change in process?

You are right of course re 'accessing equity'.

 

Needs to be a lot of dividend income and rental income to be able to service the debt, just because a property is cash flow positive doesn't meant it will be on a lenders serviceability calculator, rental income is shaded, dividend income is shaded, buffers are applied to existing and new debt. Some lenders will just flat out not lend to someone who only has investment income.

Can you explain what low touch and high touch lenders are?

 

Cash flow positive by consumer (and tax) standards isn't sufficient to qualify for a loan by bank standards. Lenders have to factor in interest rates 3% higher than you are paying, living expenses payments for any other debts, even unused credit card limits.

It is possible to qualify for a loan using just rental income, but in my experience it's very rare that anyone can actually acheive this. The examples I've seen have more than 3 properties that are unencumbered (no loan at all).

 

High touch: It appears that some lenders go through a whole credit approval process when a subdivision application is received. That means if someone was FIREd and trying to subdivide, they may conceavably fail that test (*) and be asked to repay the loan. Development returns may thus not be attractive if a project has to be 100% equity financed (leverage is a pretty substantial part of property investing and without it, investing in dividdnd stock may be better value).

Low touch: other banks may be happy without checking payslips etc for existing client. This means the development itself would likely still need to be equity financed, but at least any existing debt may be 'grandfathered'.

The alternative would be to try and return to permanent employment whenever a subdivision / development is due. This may or may not be easy to do (whole different topic).

Hope that makes it clearer for you?

(*) @Terry_w totally take your point that an income stream sufficient to FIRE may not be sufficient for a bank due to
- shading,
- lean FIRE expenses being overridden with statistical averages
- etc

 

No, ALL lenders go through that process, even the via commercial lending process.
No such thing as high touch and low touch in residential lending, I've been doing subdivision/development funding for a while now and I've never heard the terms which is why I asked for the explanation, thanks, always learning.
You need to pass the credit assessment for equity funding, even if you're an existing customer.
Only way to avoid that is via private lending.

 

@Lindsay_W it seems like @Terry_w had a different experience?

note in step 1, we are not talking about obtaining additional funding, only getting bank consent for new titles to be issued.

 

Right, then yes the lender needs to consent and it typically comes down to your loan to value ratio, as long as the LVR is the same or less than current LVR. You can either have the exiting loan secured by both lots, split into 2 (1 for each lot, ideal) if the LVR allows you can have one unencumbered lot (not always ideal)
Some lenders only require the valuation to give consent without credit assessment.

 

Yes, these are th I labelled "low touch". (copyrighted term )

Noting the risk policies can change at any time.

 

I get it now and I like it !

 

Interesting thread.

My memory might be failing, but during the process of demolishing a house, subdividing the block into two and selling both, I don't recall advising the bank who held the mortgage on the original property of anything in advance...

Didn't know I had to - and didn't ask just in case, as I was made redundant at work smack bang in the middle of the whole thing.

Stressful year 2020.

 

Your subdivision means you're changing the title, which is held by the bank. They would definitely have been made aware of what you were doing.

 

Typically can't get the titles issued without the mortgagee's (lenders) consent as far as I'm aware.

Hopefully 2021 has been less stressful for you?

 

Oh yes, for sure. I just didn't personally advise them in advance of the bulldozer coming in.

Cheers @Lindsay_W . It's been a slow U-shaped recovery but definitely on the up now.

 

I’ve subdivided a couple of properties over the last few years and haven’t had to prove income or reapply for loans.
Both with Commonwealth.

Neither time I was demolishing the existing property so that might be important but they were happy as long as there was enough equity in the properties.
I had the choice to have the loan over the 2 lots or if the existing house had enough equity in it I could just have the loan against that property and gained a empty lot with no loan against it.