How does rental income impact serviceability?

Discussion in 'Loans & Mortgage Brokers' started by jyeung80, 10th Mar, 2018.

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  1. jyeung80

    jyeung80 Well-Known Member

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    As a simplistic (and I realise unrealistic) example, let's say a lender assumes your IP is rented out 50% of the time, so they take 50% of your rental income into account when calculating serviceability. If your rental income is more than double the min. P&I repayments and you could keep finding IP's that pay more than double the min. P&I repayments, it would mean, theoretically, that you should be able to keep borrowing money to buy such IPs forever. Theoretically. So at what point would a lender stop lending you money? I'm assuming there's no fixed, maximum amount that they can lend, so what would dictate that they could no longer lend you any more?
     
  2. ShireBoy

    ShireBoy Well-Known Member

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    That would require ~10% yield, though. Isn't that right?
    How many consistent 10% yielding properties do you hope to string together?

    *EDIT* And that's on an IO loan. A P+I loan would need an even higher yield... 15%?
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    simplified

    lenders will allow 80 % of grossrental generally,

    Some cap the max at 6 to 8 % of the capital value

    With many lenders, as your total income increases your living cost minimums also go up

    Many will see you as "rental reliant" where you get more than 50 % of your total income from rent

    as a very rough guide.................

    330 per week per 100 000 lend will see you as neutral for a middling income borrower at 5 years IO and 25 PI if you can sell that sort of yield to a lender

    at 80 % lend its around = 17 160 / 125 000 yield = 14%

    Back to the salt mines for you ;)

    ta
    rolf
     
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    xcellent punt :)

    ta
    rolf
     
  5. Lacrim

    Lacrim Well-Known Member

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    What about the difference between living in a PPOR vs a rental?

    If say, you're paying 5% IO on a $1m mortgage ie $50K a year vs renting a property that costs $50K a year.....which is more onerous from a serviceability calc perspective?
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Onerous :)

    Must be an APRA auto correct hahah

    A lot depends on the taxable income of the owners and who owns what

    ta

    rolf
     
  7. Lacrim

    Lacrim Well-Known Member

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    Would've thought the mortgage bc the bank factors in a higher interest rate.
     
  8. Jane Ridder

    Jane Ridder Well-Known Member

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    A lot of people assume that lenders look at property investor cash flow and deductions the same way as the ATO does. Unfortunately, it doesn't work that way.
     
    Last edited: 10th Mar, 2018
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    neg gearing for some one on 250 k is very diff than on 40

    ta

    rolf
     
  10. Lacrim

    Lacrim Well-Known Member

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    Ah i see tx
     
  11. jyeung80

    jyeung80 Well-Known Member

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    Thanks for the replies. As I mentioned in the original post, not a realistic scenario, but wanted to understand better how rental income helps with serviceability. First post by @Rolf Latham explains it well.
     
  12. dabbler

    dabbler Well-Known Member

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    Here is a thought....money talks and bulkshit walks.....if you have the income legally, they will look at it, they wont loom at more than markey or valuers amount on a new buy.
     
  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Even if you can get 10 % agreed to by the valuer as market rent , increasingly banks are looking to limit same to 6 to 8 anyway, and on a portfolio basis, a high reliance on a mix of say10or 20 rental properties is considered high risk.

    Better you have ONE. Payg job bringing in the same amount rather than a diversified rental investment portfolio.

    It's obviously clear that all 20 tennants in different states will conspire to run away and the chance of that is higher than you losing the one job
    Ta

    Rolf
     
  14. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    High yielding IPs can help with servicing - but as mentioned above a lot of lenders cap the yield at around 6%

    I placed a deal with a lender last week for an investor with multiple IPs - it serviced by a tiny amount.

    The valuation on one of the IPs came back a fair bit shorter than clients estimate - the assessor had to reduce the rental yield they could use from that IP. End result was that it not longer serviced by a few dollars. We managed to get it sorted - but just goes to show the impact that capping rental yields can have.

    Cheers

    Jamie
     
  15. dabbler

    dabbler Well-Known Member

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    Yeah.....what I meant is as you hold, they then can work off actual income, dont think a high yeild will work in favor on the one your trying to buy now.

    I have had lenders even cut the LVR on buys that were very cheap compred to market and vals......

    They have the money so they make the rules.
     
  16. Redom

    Redom Mortgage Broker Business Plus Member

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    Lender calculators are based on applying buffers designed to stress test a borrowers ability to repay under different circumstances.

    Hence you have rules like:
    - A 2% assessment rate buffer
    - Reduced loan terms on IO lending
    - 80% of rental income being used
    - 80% of variable income sources being used

    The idea is to stress test.

    Hence the theory of continuing to buy based on yield no longer really works. It does, at very low LVR's as the yield on debt can exceed 10% that way.

    In general, rental income has a multiple of around 5.5 (200 per week addition in rental income will add circa 50-60k in borrowing cap on an individual loan).