How lenders calculate your borrowing capacity in 2017

exactly @Jess Peletier , with these lenders, ppl should use them at a last option. and be extremely careful if ppl want refi their PPOR to these lenders to extract equity. using them to purchase IPs is ok ( because you can sell if things get tough, but not so easy with PPOR).

 

So average couple who both earn $70k each for a combined income of $140k before tax and $108,606 combined after tax can borrow $850k?

Weekly income is $2,088/week.

P&I loan repayments on $850k are $1,370/week, which is 65% of their income.

Couple have $718/week left to pay for food ($200/week) transport ($100/week) electricity ($30/week) council rates ($20/week), strata fees ($50/week), car rego insurance, servicing, etc. ($60/week), fuel ($40/week), utilities ($40/week), entertainment ($100/week), misc. expenses ($60/week).

We are now out of money... nothing left for water, gas, health insurance, gym, coffee, holidays.

What happened to 30% of income on property for your minimum repayments? Looks like that has been reversed.

There is no buffer there with excess cash for emergency-like events, e.g. Car breaks down, fridge or washing machine stops working... and should one person lose their job or have to take time off work, they are up !$&@ creek without a paddle.

30 years without a recession, so we don't take into account that these are facts of life for some people?

 

All your expense figure are at least 40-50% higher than the actual

 

Just because they CAN does not mean they SHOULD. My advice would be to BUY A CHEAPER HOUSE. This example is two people on a low income. They can't afford to spend this much on housing.

What interest rate did you use? I just checked the Westpac one @5.24%, which is $4688.47 per month. With borrowings that high, you can get that lower. if you borrow $600k @ 5.24% the repayments are $3309.51 per month. That is a saving of around $250pw.

Now lets look at the rest of these expenses. $200pw for food? We don't pay anywhere near that amount & we eat well. Fresh meat & produce, nothing prepackaged. Strata Fees? $50pw? You are suggesting this mythical couple are purchasing a UNIT at close to $1m? Like I said....a cheaper property, if it's freestanding, there's no Strata.

Now...I don't understand this one. Transport $100, Car expenses $60, Fuel $40. Hubby caught a train from Western Sydney everyday for work, before he retired. The cost was around $60pw. There are NO units out this way that come close to that price tag, so I would suggest that transport costs would be significantly less. If you are consuming $40pw in fuel, then at least one person is driving.

This is why people get into trouble. Things like entertainment, gym, coffee, & holidays are discretionary spending. Sometimes you have to sacrifice something to get what you want. If you WANT an expensive property, you are going to have to do without, learn how to budget much better, get a better paying job(s). Too many people out there are not living within their means, and when the tide turns, they are going to get caught with their pants down. Sure, it might be nice to live in a million $$ apartment, but realistically, this couple should be setting their sights much lower to avoid future disappointment.

 

People know how I feel about the these 'payday lenders' with their ridiculous high interest rates and questionable ethics.I think for me personally, the deal has to be relatively good for me to continue using these mobs.

With many changes happening in the industry, I feel that there are alternative options out there for investors to build on their financial freedom such as investing into good quality shares, work on your respective career or start a business. I've noticed some of my younger friends developing some apps and starting a small business.

 

Hi skater, the interest rates should be calculated at 7-7.5% as banks do, and not at 5.24% we can currently get as it's way to low and won't stay there. At 7.5 weekly repayments on P&I are $1209 a week though. Living standards I find are usually under calculated, great if you can eat of 200 but we could never manage that. I find budgets for a couple usually run 32-46k and that's not crazy spending either, 2 cars and basic living. I've run budgets for many couples and yet to find a couple under 32k or 615 per week.

I agree with your post though regarding just because you can borrow that amount, doesn't mean you should. I do believe the banks have been irresponsible by lending way more than they should, I've taken advantage by this as has everyone else I'm sure and still are.
Wonder if house prices would be this high today if tighter lending standards and true living expenses were calculated by the banks years ago.

 

I agree. My answer was in response to the OP who gave a figure as to what the expected repayment was, not the rate that a bank would calculate.

We find it pretty easy, but we don't buy any drinks, snacks, bread or prepackaged items. Our shopping list is predominantly meat, cheese, yoghurt, cream, vegetables, eggs. The meat is predominantly the cheaper cuts, with more fat on it, as we follow a LCHF diet, and eat only two meals a day. I see the mountain of food in many shopping trolleys each week, so am aware that we are unusual.

 

I went with the interest rate in the original post which banks will now assess people at. That is also the rate I use for my own calculations in buying a property as I like to be conservative and work with the long-term average interest rates.

I see plenty of units selling for $700-850k. Strata fees are commonly $700-1100/quarter. So not example is not too far fetched at all from reality.

We personally pay over $80/week on train costs (couples who live out west pay closer to $120/week as backed up by the example of your husband paying $60/week).

We go to the gym, take our dogs for a walk, go out on weekends so as a result we own one old second hand car which we pay to keep on the road and service, along with fuel consumption every week. Average car costs for a couple would include CTP greenslip $700, comprehensive insurance $1,000, rego ~$300, servicing $100-200/service, repairs $1,000 = $3,100. Sure, you may not incur $1,000 in repairs every year, but best to bud get for worse case scenario. Actual costs may only be $2k a year. My personal car costs are not this much as I only have third party insurance at $300/year. No doubt I could save money if I didn't own a car, but life is too short to sit around in my house all weekend. The benefits of owning a car far outweigh the costs as it allows me to access many things for free such as taking my dogs for a walk, the beach, hiking, etc.

There's a whole other world out there apart from Western Sydney, skater! I am in complete agreement that someone SHOULD NOT borrow that much just because the banks will lend them that much... my point is that the bank's lending assessment is far from conservative IMO.

You also do not fit the profile of an average person... you resemble much more the profile of the Millionaire Next Door.

 

If interest rates doubled to 7.5% I'd suggest most people would be reassessing their living expenses. They might even cancel their Foxtel subscription....

 

Netflix went up to $9.99 per month, maybe some people need to tighten their belts.

 

This is what I want to know, I hope this isn't the case,...

 

OK....so the actual would be much less than the current assessed rate, so if these people were sensible, they'd be putting something away for when rates do eventually go up.

A couple of points here.

Yes, there ARE plenty of units at that price, I'm not denying that at all. However, your post stated a LOAN of $850k. I would presume that someone getting a loan of $850k for a PPOR would have a deposit, so the cost of the property would be higher than this. This is where my figure of close to a MIL came from. This is a VERY expensive property for a couple pulling in two lowish incomes between them. Yes, it can be done, but at what cost?

I'm not denying that cars cost money to keep on the road, however the example of $40pw for fuel, suggests more use than just weekends, unless there is a very large motor, or an unusually large amount of driving. This is why I questioned that point.

I didn't think we were discussing anyone's actual costs, this is all hypothetical .....isn't it?

Owning pets, gym membership, holidays, coffee's, smashed avo's. These are all discretionary spending. These are not things that should be taken for granted. It's great that YOU can afford them, but these are things that you have to really look carefully at your budget before you jump in, if you are on a low income, the same as your choice of home when it comes to mortgage payments.

AHEM.......What kind of backhanded comment is that? Where I live does not define me, or my lifestyle at all. I don't sit around Western Sydney all day every day, you know.

 

$70k is the average or median salary for someone in Sydney. I think it's a little condescending to call it a low income.

In the real world, I know people who haven't even got a pay rise for CPI for a few years so they are going backwards.

All hypothetical? I dunno skater, you seem to like personal examples when it suits your points.


Not a backhanded comment at all. I don't think there's anything wrong with Western Sydney at all, I was looking out there for places on Saturday myself. Most of what you contributed seemed to be based on your personal experience and budget... this is not assess a person's personal spending/budget, I was assessing costs of average people in Sydney. Your mentality (although I am largely in agreement) is not typical of the average person.

 

ABS, November 2016 shows average full time ordinary income of $1533pw ($79716pa) and average full time total earnings of $1592pw ($82784pa).
6302.0 - Average Weekly Earnings, Australia, Nov 2016
This is the Australia wide figure, there are a lot more high income earners in Sydney than the rest of the country, so commonsense would dictate that the average full time income would be more than $80k per person, so no, it is not condescending to say that $70k is a low income.

Me too......but I also know people who have large pay rises every year, but I'm not sure what this has to do with the discussion.

Australian spending habits | ASIC's MoneySmart OK, I know this is a couple of years out of date...I couldn't find a more recent one, but if you scroll down to the chart of weekly spend by stage of life.

This is probably more accurate than either of us, on what the AVERAGE couple spends their money on. You will note the housing cost @ $360pw. It's a couple of years old, pre-boom, so for interests sake, we could double this to $720pw. Not at all accurate, because rents have not doubled, and although the cost of houses in Sydney HAVE gone up significantly, the actual mortgage costs have been kept low due to the low interest rate environment.

A couple on an average (or below average) income should be looking for housing that is relevant to their income level. As above!

This is the entire crux of what I am trying to point out. People on low-average incomes who are trying to keep up with the Joneses by buying a million $$ property need to get real! It can't be done! Not long term anyway. Not if their incomes aren't going to increase, or they want a family, or they lose an income, or they want to enjoy more lifestyle than slaving away just to pay for housing.

There is no need for personal attacks, just because I don't agree with your point of view.

 

For those that are interested, here's a breakdown of how lending changes are happening now. They're smaller and less noticeable (large ones for investors have already happened). But the regulators are still very much on top of things & actively looking at banks policies.

In opening post, i talked about the 'APRA calculator' and how its based on a prudential practice guideline. All ADI's are told to follow this. This has been the instrument of choice for APRA to get lending policy changes through.

Essentially they update this guideline, ask banks to follow. They don't always do it all, APRA go in & look specifically at what they're doing & get them to follow it. Hence all calculators are looking more and more similar now - the 'APRA calculator'.

This guideline has got more and more prescriptive in recent years. They are leaving far less wiggle room for lenders to 'interpret' the guidelines. APRA have learned that lenders are in the profit business & will manoeuvre whereever they can.

One example of this is the negative gearing add back into serviceability calculators. A few lenders have sneakily added back interest expenses at the assessment rate (i.e. 7%) instead of the rate the actual borrower pays. This doesn't make much sense, given that the borrower can't claim 7% interest rates on their tax returns. APRA got wind of this & adjusted their guidelines in Feb/March this year to account for this.

Now we're in August & one of the larger lenders - St G/BoM has reversed their negative gearing treatment back in line with APRA's guidelines. The mechanics of their calculator meant that St G in fact had one of the more favourable borrowing power calculators for new investors, because their negative gearing treatment didn't follow APRA's guidelines. This won't be the case anymore once these changes flow through.

http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-223.pdf

 

how are credit card balances used?

do they use an average of what they see from your credit record and simply subtract that to get to your net income?

what if we pay the balance off before the statement date / reporting date (i am not referring to the due date) which is when the bank reports the balance to the credit agency (resulting in no outstanding balance)?

 

They use the credit card limit * 3% = monthly expense included in your assessed expenses. Some use 2.5%. Balance doesn't really matter (limits used)

 

Most generally look at the total limit and work out a repayment of 2-3% per month - balance is ignored as they need to work on worst case with credit cards maxed out. ie a $10,000 credit limit will result in a repayment liability of $200-300/month in the calculations.

There are some fringe lenders which can look at excluding credit cards from calculations if they're paid in full each month, but I think we'll see this going the way of the dodo as lender policy is tightened.

 

I understand the reasoning but the thing I liked about STG/BOM was that the negative gearing add back made sense.
If you're factoring in the rates going to 7% and buffering the loan at that, the interest claimable will also be at 7% and reflected in taxable income.
BUT yes, that's not being paid NOW so you're giving more lending capacity based on a potential outcome that may or may not come to pass. So to cover their butt the borrower gets the blunt end of the stick if you like.