How to calculate changes to your borrowing power

Discussion in 'Loans & Mortgage Brokers' started by Redom, 7th Mar, 2016.

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  1. Johann_

    Johann_ Well-Known Member

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    Keep things simple, talk to your broker and get an update on how much you can borrow :).
     
  2. Vanillascent

    Vanillascent Well-Known Member

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    Thanks for this. I realised today that my salary has gone up 15k this financial year and was just about to look into how it may impact my borrowing capacity. Your post had excellent timing.
     
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  3. raj_27

    raj_27 Well-Known Member

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    Great post @Redom .
    I am doing a long term (12 year -15 year) plan on a spread sheet and trying to see how many and how quickly i can buy IPs. I was checking my borrowing power using DSR (Debt to service ratio).

    DSR=Total loan repayments / (30% Total salary+80% Rent)= should be less than or equal to 100%

    Is this a OK measure for what i am doing? Any others formula i should be using?

    I am talking to our Mortgage Brokers (they are here on the forum) this Thursday,but I am getting impatient in completing my spreadsheet.
     
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  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Unfortuantely it's not even remotely close to being that simple. :(

    You also forgot to include living expenses (it's a fairly big deal), then there's the question of how to calculate total repayments, tax rates on your salary, different types of income being treated differently, etc. It's not just a question of what needs to be included, but how to calculate what's included.

    Also keep in mind that many lenders don't actually use the DSR method. Most use a Net Surplus method for servicing. Essentially how much is coming in, subtract what's going out and figure out what's left to service the next loan.

    I've tried to write a spreadsheet to predict future affordability. I dare say my understanding of lender policy, applying it to maths and programming skills are all better than most, but the task is quite tricky. The best way I've found to do it is to simply model one purchase, then a new descrete model for each subsiquent purchase.

    That said if you're determined, give me a call. I'd be happy to help. It's a great idea! :D
     
    Last edited: 15th Mar, 2016
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  5. raj_27

    raj_27 Well-Known Member

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    Thanks Peter, That is bit of relief. According to that I would max out after 2 properties for 3-4 years. I might give you a call tomorrow may be its bit too late for today.
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I hate to say it, but anecdotally these days most people are maxing out after 2-3 properties and they're probably going to have to anticipate a wait of a few years before the next.
     
    Last edited: 15th Mar, 2016
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  7. raj_27

    raj_27 Well-Known Member

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    I was doing a very conservative calculation, and that seem to be very close to reality. I am happy with that i think. I was using DSR for calculating how often i can buy considering very modest 5% CG and 5% Yield and no tax benefits.After 3 years i should be able to get some equity and invest further. This is just a plan to see what i can reach in 12 years time. With most min effort (no value adding).

    Like lot of people mentioned, for more accurate figures MB will be the one to contact.
     
    Last edited: 15th Mar, 2016
  8. wombat777

    wombat777 Well-Known Member Premium Member

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    I created myself a simple spreadsheet based on the scenario posted by @Corey Batt in this thread - Is there a brick wall ahead? . It was easy to adapt for my own needs, taking in account my existing properties and current income.

    With a bit of Googling as well, it seems that many institutions have been using quite conservative figures in their serviceability spreadsheets. Some xls files are readily available although somewhat complicated for basic modelling.

    When I talk to my broker next in May, I will get him to run numbers for from 2 to 4 additional IPs and see what is realistic and achievable in the next few years.
     
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  9. raj_27

    raj_27 Well-Known Member

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    Thanks @wombat777. Do you ming sharing that spread sheet? Simple is what i require at for my calculations.
     
  10. wombat777

    wombat777 Well-Known Member Premium Member

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    @raj_27, sorry not willing to share as it is a bit rough and has been developed for my specific purposes. It would be a good exercise for you to learn how to do basic modelling in excel. This is something that is a very useful skill to have as a property investor. Google and you should be able to find plenty of spreadsheets to get you started. If you decide to roll your own, the assumptions that @Corey Batt used in the scenarios in Is there a brick wall ahead? are quite clear ( although rent income in that scenario seems to be at $400 / week and not $300 / week ).

    One thing that I purchased some time back was a license of Investment Property Calculator Excel Spreadsheet . The 'ultimate' version includes a serviceability calculator ( although I can't recall if I have that version ). There is also a free version with fewer features Free Investment Property Calculator Excel Spreadsheet .
     
  11. raj_27

    raj_27 Well-Known Member

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    Thats OK @wombat777 I will go though the thread and accommodate in my spread sheet. I know a bit around the spreadsheet being an Engineer by profession. Just curious at what formula you were using. I am working on a spread sheet, which should allow me to look at different strategy to to achieve the end goal in given no of years. Once it is presentable i will put it out for critique from PC expects. I need a rough one now to get me started with IP Journey and not over analyse the situation.
     
  12. Wukong

    Wukong Well-Known Member

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    Personally, I trust my broker and leverage on their expertise :)

    I focus back on my personal expertise in generating income to fund property purchases.
     
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  13. wombat777

    wombat777 Well-Known Member Premium Member

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    @raj_27, there are also numerous spreadsheets available on somersoft which are worth a look Somersoft Spreadsheet Collection - Somersoft Property Investment Forums

    As for forumulas, I just used:
    - 80% of rental income
    - loan interest rate at 7.5% ( although some banks use 8% )
    - for each purchase income is cumulative of PAYG and rental income across all properties

    Just follow Corey's scenario. It does not take a great deal of work.

    @Wukong, yes you can talk to a broker and I do when needed / ready. I just find it helpful and better to do upfront what-ifs so that I can think about different finance / purchasing / investment strategies. It also helps with goal-setting.
     
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  14. Carrytrader

    Carrytrader Active Member

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    Awesome, thanks. Always knew credit card limits can be a killer but didn't realize it was this much.
     
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  15. yorkie

    yorkie Well-Known Member

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    hi guys, sorry i'm hijacking a thread here but there seemed a lot of brokers here so thought i'd get a good response..!!

    probably mostly aimed at the mortgage brokers but will also apply to lots of business owners too.
    do i finance a new 100% work vehicle with a "chattels car mortgage" (very good for high business use) or do i pay cash..... ? the thing is which is going to work against me in the future for applying for finance. ? new vehicle is $38000. any thoughts or ideas welcome.
    thanks in advance yorkie
     
  16. albanga

    albanga Well-Known Member

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    With my most recent loan, my broker only had to factor in the finance component of my novated lease as opposed to the included running costs.

    I simply provided the cost breakdown provided in my driver report which showed the monthly finance component and that is all we used for servicing and it passed. If I had to factor in the total lease cost it would have failed.

    That is just logical though if you ask me and surely any assessor would understand all running costs can be switched off with a phone call. The only thing you can't stop is the finance like any normal loan.
     
  17. Terry_w

    Terry_w Broker, Lawyer, Tax advisor, Debt Recycle advisor Business Member

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    How should you structure the financing of a car?

    Probably you should seek tax advice first.

    I would probably do neither.
    Firstly don't buy a car, they are depreciating assets.

    If you must buy a car don't buy brand new.

    Try to keep the price under $20k so the business operator can claim the whole cost in the first year + claim any GST.

    A chattel mortgage is likely to be high rates and PI payments. This reduces borrowing capacity significantly as the repayments are high. It might also divert funds from paying down non deductible debt.

    If you have equity in property it may be best to set up a separate loan split borrowing against the property. have this IO over 30 years. if the business is a company on lend this money to the company which then claims the interest as a deductible (might have to apportion it for private use).

    if you haven't got equity in property think twice - should you really be borrowing to buy something you probably can't afford?
     
  18. Corey Batt

    Corey Batt Well-Known Member

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    Finance is a cost of business - but you only have so much capital which can be utilised so it's more a case of what you can do for the same money. If you're borrowing at 5% for a work vehicle, can you put the money to better use somehow which will produce a greater than 5% return? If yes, finance may well serve it's purpose. If there is no valued use you can find for it within the business (or disbursing it out of the business for personal use at a greater return) then pay cash.
     
  19. yorkie

    yorkie Well-Known Member

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  20. yorkie

    yorkie Well-Known Member

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    I can afford it. More a question of i have the cash there. I have no non tax deductable debt, its all i.p debt. So no advantage there. Just do i use my cash for more investmnt debt or car which is 100% business use. And can also claim the gst back in first bas and all the other costs. Not sure what toyota finance are looking at interest rates wise at this point. Watch this space. Also to buy a 2nd hand car with 60-100'000 ks on cost approx $33-35K. can buy new for $ 34800 ON ROAD. With 5 years warranty n roadside assistance and free servicing for a year. No brainer really. Never ever thought i, d buy a new car because of all. Its a depreciating asset etc.