How to calculate changes to your borrowing power

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

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  1. Redom

    Redom Finance Strategist Business Member

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    Renting at $500 p/w is considerably better for your future servicing than having a $500k owner occ mortgage.

    Thats more of the interpretation of the above.

    E.g. in your scenario (assume that CBA calculates all debt, new and existing, @ 7.25% as its more comparable between different lenders) - you can borrow another ~$220k for an investment after you live in the owner occupier. If you rent the owner occupier, its more than $400k+, simply because the 'accommodation' expense is far less when renting vs living in your own place.

    Essentially living in your own place is sensitised because there's mortgage debt attached to it. Renting isn't, banks don't increase your rental expense in their calculators, they take it as is.
     
  2. Ethan Timor

    Ethan Timor Well-Known Member

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    Not sure how you got to these figures. As mentioned, I got to different figures:

    To clarify, the above assumes no existing commitments, only the new $500K loan, leaving additional borrowing power of $560K or $768K depending on the option taken.

    Yeah, sure, if you create an option 3, then renting out the new property increases your borrowing power:

    Option 3:
    rent for $26K p/a ($500 p/m) without adding anything to 'ongoing annual rental payments' or to 'living expenses':
    Borrowing power: $958,256.

    Hope this is making an interesting read to all :D
     
  3. tobe

    tobe Well-Known Member

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    Future servicing is the key words here.

    Yes you can borrow a higher amount on most calculators with ppor debt than renting and investment debt even with a new rental income.

    But if you take that scenario to the next purchase scenario, renting is better.
     
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  4. Redom

    Redom Finance Strategist Business Member

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    Tobe's answered you much more eloquently than i could have put it. :)
     
  5. Ethan Timor

    Ethan Timor Well-Known Member

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    This is a fun exercise! At least for me ;) Hope others see benefit in this as well :rolleyes:

    Challenge accepted! :D

    Ran the numbers on this scenario in CBA's calculator:
    Single, no dependents, $1.2K living expenses, $100K PAYG, has an existing loan of $500K at 4%, 30 years, p&i and wants a new $500K loan, 7.25% assessment, 30 years, p&i.

    Option 1:
    Existing property is being rented for $26K p/a ($500 p/w) + add same to 'ongoing annual rental payments' (borrower is renting elsewhere) + new property will be rented for $26K p/a
    Borrowing power: $347,124

    Option 2:
    Living in existing property, renting out the new property:
    Borrowing power: $431,413

    Option 3:
    Existing property is being rented for $26K p/a ($500 p/w) + new property will be PPOR
    Borrowing power: $439,475

    Option 4:
    Existing property is being rented for $26K p/a ($500 p/w) + new property will be rented for $26K p/a without adding anything to 'ongoing annual rental payments' or to 'living expenses':
    Borrowing power: $745,261

    Unless I made a mistake somewhere, it seems that unless our friend, Mr X., claims that he lives on $1.2K p/m no matter if he rents or not, then buying the next property as PPOR while renting out the existing (or planning to, once he buys the new property) is the best for his borrowing power?

    This is of course the scenario with CBA. It may be a different story with a different lender. Westpac these days, for example, continues to use ACTUAL rates and repayments on all existing loans for serviceability.

    So much fun! :D
     
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  6. tobe

    tobe Well-Known Member

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    Maybe. I haven't got time to follow your example exactly but I was modelling a similar scenario this morning couple, middle incomes, couple of rentals and oo debt. In the cba calculator if I change the existing oo debt into investment, add $500 rental income and $500 expense the capacity increases by $200k.
     
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  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Odds are that the calculator you used won't stack up to actual credit assessment. The theory of what you're trying to demonstrate will hold true, but don't take any online calculator as an actual approval. Even the calculator the CBA supplies to brokers isn't the one their credit assessors use and it almost appears to be designed to encourage mistakes.

    Westpac doesn't take actual repayments. It does look that way from their calculators, but they add extra loadings behind the scenes. If they took actual repayments, they'd be lending significantly more than what they currently do.
     
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  8. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Nah they load them.

    You will see down the bottom left of the calc.
     
  9. Perthguy

    Perthguy Well-Known Member

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    Since this is a thread about changes to borrowing power, I was wondering if I can get advice on the following:

    1. I have a variable loan and I fix it for 3 years at 3.99%. Does this change my borrowing power for a new loan?

    2. I have a credit card with a $15,000 credit limit. I drop the limit to $5k. Does this change my borrowing power for a new loan?

    Thanks to all who are contributing. In the old days I didn't care about my borrowing power. I just called my lending manager and he wrote me new loans. Consequently I have no idea what affects borrowing power and what doesn't so I find information like this invaluable.
     
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  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    1. No. Years ago some lenders treated fixed rate loans differently, I can't think of anyone doing that now.

    2. For every $1k in credit card limits you have, you loose about $4k in borrowing capacity. Reducing from $15k to $5k will improve your borrowing capacity by about $40k.
     
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  11. Perthguy

    Perthguy Well-Known Member

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  12. Ethan Timor

    Ethan Timor Well-Known Member

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    Good stuff, thank you!

    Very interesting! Guess it does work that way on some scenarios (depending on the marginal tax, negative gearing and so on) but it doesn't always work on all scenarios (as demonstrated in my example above).


    I am using CBA's calculator that they supply to brokers. Agree that it's not the same the credit assessors use but no broker (I presume?) has access to that and we all work with the same calculators.

    This is probably going a bit off topic but that's interesting! Are we all using the new calculator? My comment was derived from their BDM's email earlier this month. His exact words are: "Westpac continues to use actual rates and actual repayments on all existing loans for serviceability."

    Wishing us all a great week! :)
    Ethan
     
  13. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You enter the actual rates and repayments, but Westpac loads all liabilities later on. They've always done it this way (at least in my 12 year experience). If they used actual repayments, they'd be lending about double the amounts they currently do (compare it to the Liberty calculator if you want a point of reference).

    The problem with the CBA calculator is it asks what the existing loans repayments are, actual repayments is not the figure they want. The correct figure is the repayments over the remaining amatorisation period. This is usually about 30% higher, but it could be as much as double. The calculator then loads that figure by another 20%.
     
  14. Ethan Timor

    Ethan Timor Well-Known Member

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    Very good point. However, they are using the actual and not the P&I as CBA so they have that going for them ;)

    I know. In my example above I used the P&I over 30 years :)
     
  15. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The Westpac calculator is one of the better ones out there, I can come up with scenarios that would make either lender look better. In my experience the CBA tends to be more generous. They're also more straight forward in many policies.

    If the loan is 30 years P&I, then the CBA will accept a 30 year P&I calculation. If it's 5 years interest only & 30 year term, you need to use a 25 year amortization period. They do require statements as evidence of this (I swear they're paperwork junkies).
     
  16. Corey Batt

    Corey Batt Well-Known Member

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    Definitely agree with Peter here - for most scenarios CBA provides a better overall calculator/policy set than WBC for a range of borrowers.

    New brokers do stumble on these little tips/tricks often - I remember the CBA state manager saying not that long ago circa 40% of applications were declining at the point of submission, largely due to misunderstanding how to fill out the calculators correctly.
     
  17. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If you weren't going to live in the house you're purchasing, you'd include rental income in the calc as well as negative gearing. As it is, you have an empty house plus the expense of a rental cost.

    *Edit - should have read the whole thread before commenting :rolleyes:
     
    Last edited: 12th Dec, 2016
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  18. Anthony Brew

    Anthony Brew Well-Known Member

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    Sorry to drag up a very old thread. Have a couple of questions.


    I was told that yield has a very large impact on serviceability.
    For say a $500,000 property getting say 3.5% vs 4%, the yield difference is $18,000 income vs $20,000 income.
    So going by the above figures, this would only affect serviceability by about an extra $10,000 that can be borrowed (?)


    So if I wanted to increase serviceability, I could change back to P&I?
     
  19. Colin Rice

    Colin Rice Well-Known Member

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    Sounds about right.

    Yes that is correct but will impinge on cash flow.
     
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  20. Jose Eduardo Slompo

    Jose Eduardo Slompo Well-Known Member

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    Awesome thread, guys, lots of learning from here!

    Basic question from someone who's just starting out: do CF+ properties affect serviceability at all? In other words: if I only purchase cash cows, will I ever have serviceability problems? What will happen when I get to, let's say, 10 loans for 10 CF+ properties (i.e. hugh debt, positive CF)?