How to calculate changes to your borrowing power

Unibank have a servicing calc that buffers other bank debt at 20% similar to NAB. Found out today whilst speaking to the BDM.

They have just come on my panel of lenders so will come in handy for those clients approaching the serviceability ceiling.

 

The question is for how long - before they're flooded with new debt which they can't handle.

 

Thats on the list of questions for the BDM visit come Monday.

Usually happens within 3 months.

 

I'm posting here so this thread can float back to the top...
I think this thread is worthy of a sticky (though lending rules change, the general principles of impact to borrowing capacities in each scenario remain).

 

I was wondering how much rental income from a commercial building helps with servicing. Say a low income earner bought a commercial building. Taxable income $15,000, minimal expenses.

Say this investor bought a $500k commercial investment property, long lease, returning 7% at a 70% LVR. The loan would be $350k, annual interest ~$17k, annual rental income is ~$35k

How much of the ~$35k might be able to be counted for servicing and roughly how might that translate into an increase in borrowing capacity?

 

With the mainstream lenders - it would still represent a negative cash flow return investment, which would result in a decrease in borrowing capacity.

The existing debt would be treated either at the servicing rate of the lender, if not 2%+ above the prevailing rate of their existing loan at principal and interest repayments. Meanwhile the rental income would be shaded 20%.

 

Thanks @Corey Batt. Would it make any difference if the loan was a lease doc loan?

 

It doesn't change anything for the borrowing capacity once setup - banks look at what income and liability is, not how the product was assessed. Of all things being a lease doc it's likely to be a slightly higher rate than a prime commercial loan, so it'll be a step backwards.

 

The question was badly phrased for pedantic finance guys.

Will commercial rental income be better than Resi rental income when I apply for another resi loan?

The yield is higher, some lenders may use the actual rent, but most will still buffer by at least 20% for costs. Some won't use any if the lease has a term less than 5 years to run. So the answer is 'maybe', depending on the lender.

It might be a good niche to build, a lender that uses full comm rent for servicing and takes actual repayments for fixed comm loans for instance, but the way lenders change policy lately it'd be hard.

 

There are risks with CIP as well. The main one being losing a long term tenant and extended vacancies while finding a new tenant.

The issue I am trying to solve is a low income earner who wants to invest in resi. I was looking at CIP as a possible solution. But if the rental income isn't treated that favourably then it's not the solution I was looking for. He might be better off forming a company, buying the CIP in the company name and drawing a PAYG wage off the rental income. Banks love PAYG

 

Commercial property probably isn't going to do a lot for increasing serviceability for future residential property, unless you can get a massive yield from it.

It does provide an alternate way forward however, as serviceability for commercial property is far more 'subjective' than residential policy. It might mean that you can continue to move forward in acquiring more commercial property instead of residential.

 

I guess the real question is, which will boost borrowing power more:

1) $70k as a PAYG wage
2) $80k as CIP rental income (assuming no debt)

 

Given banks will only take 80% of the rental income (best case scenario), the wage is going to go further.

... and sometimes some will also give you the old, 'rental reliant' line.

 

That's what I was thinking. So my not at all thought through idea is to buy the CIPs in a company name, make the investor an employee of the company and pay him a wage. The CIP rental income will cover the cost of the salary to the employee. That's assuming that super, insurance, accounting fees etc are not more than $10k per year. It's just a thought bubble at the moment and would need a of good professional advice before setting up. It's almost certainly a bad idea.

 

good thinking, but that won't work either.

Lenders will still view your client as self employed and rely on their self employed income policy rather than the payslip income. If the business is just holding one or two properties and dispersing income the assessor is still likely to apply an 80% buffer to the income.

Long story short, without an income it's tough. There are some non conforming lenders on the edge that might be suitable, but generally no.

 

Not my client, it's my mate who I have been investing with. We want to go in different directions with our investing. I would like to help him get set up to do what he wants to do, I'm just not sure how to do that. So would he still be considered self employed if he is not a Company Director or shareholder of the company, just an employee?

 

It's a lot of trouble to go to I reckon. But yes, if the director wasn't a relative, it might be possible. But super, tax, admin and accounts for a company would come close to using up 20% of the rental income anyway?

 

I've been thinking about this for about 18 months now.

There's things you can do with companies and trusts to essentially avoid the way banks assess existing debts at higher rats and the way the treat rental income. Essentially hold your property in a trust structure and get the bank to treat the trust as a black box only looking at the cash flow, rather than looking at the individual assets. Even if the entity is making a loss, it still tends to be far more favorable than direct ownership of the assets held in that entity.

The problem is most banks won't agree to it. Some do technically have policies that will allow assets in other entities to be ignored, but it can come down to the individual assessor and the quality control prior to approval. It's a very unreliable loop hole to rely on, more loans would be declined than approved IMO.

It's also the sort of thing that has to be planned right from the start. It's not a strategy that could be implemented after property number 3 or 4, it's got to start with IP number 1. Given the costs involved in this strategy and its inherent unreliability, it's not an approach I'd want to use to address serviceability.

 

Yes it's a lot of trouble but worth it if we could develop a profitable company. I think costs would erode a lot of the income though. I doubt it would be worth it.

 

Hi Redom,

Excellent post!!

Quick question - is the below still true today?

Ran the following scenario in CBA's calculator:
Single, no dependents, $1.2K living expenses, $100K PAYG, $500K new loan, 7.25% assessment, 30 years, p&i.

Option 1:
rent for $26K p/a ($500 p/m) + add same to 'ongoing annual rental payments'.
Borrowing power: $559,972

Option 2:
Live in the new property (no new rent, no ongoing rental expenses):
Borrowing power: $767,836

Seems like in today's environment deciding to live in is better than rent and rent?

Thanks for all your input and info!