How to calculate changes to your borrowing power

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

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  1. Colin Rice

    Colin Rice Well-Known Member

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    @Redom - great post mate and has been added to the "Redom" resource file :)

    It will help but probably not as much as you think. The debt associated with the properties will be treated as P&I repayments over 25 years (assuming 5 years IO initially) @ 7.25% and this is what will kill your serviceability much faster than a 5k/annum +cf property. So the treatment of OFI (other financial institutions) debt is what will stop you in your tracks.

    Also bear in mind rent is shaved to 80% of the total as lenders assume costs/vacancy periods in the calculations as well. I received an email form TMB this morning stating they will only take 70% of rental income so expect more of this across the board.
     
  2. tobe

    tobe Well-Known Member

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    Yes they do. You need a yield of about 10% and a lender who accepts such a yield for it to be otherwise.
    Trouble is propertyies with those sort of yield are usually unacceptable to lenders for other reasons. Student apartment, share house, boarders, in a one horse mining town etc.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Lenders use much higher criteria for serviceability than most people do. For a property to be cash flow positive you'll need a rental yield of about 10% of the total money borrowed for the purchase.

    It's getting incredibly difficult to find a property with a 6% rental yield, so even a cash flow positive portfolio is still going to run into roadblocks with lenders eventually.

    Right now I'm seeing a lot of people with an average income, having trouble getting past property number 2 or 3, despite having a cash-flow positive portfolio
     
    Last edited: 1st May, 2017
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  4. Colin Rice

    Colin Rice Well-Known Member

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    Thats about it for the average earner (2-3 medium priced properties) regardless of cash flow. Previous to APRA/ASIC it was up to 3 times this amount.
     
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  5. Jose Eduardo Slompo

    Jose Eduardo Slompo Well-Known Member

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  6. euro73

    euro73 Well-Known Member Business Member

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    Unless you pay down the PPOR debt as fast as possible ...which is the entire philosophy underpinning what I do . ie cash cows that punch out 8-10K each in surplus income per annum.... :)
     
  7. euro73

    euro73 Well-Known Member Business Member

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    Ultimately, you have to deleverage at some point in order to move forward again. Only the highest income earners will be lucky enough to avoid this conundrum...

    For investors with mature portflios already generating really strong CF+ results due to the length of time theyve been in the market, cash flow will seem less critical. But for those starting out, this is where 2 or 3 cash cows producing 8-10K after tax can be so powerful. If you can generate 15, 20, or even 30K per annum in surplus cash flow, then reinvest it into LIC's for example, you can build up quite a decent lump sum which can then be used get rid of quite a bit of debt after the initial I/O period of 5 years expires. That, and a modest amount of rental and wage inflation might make all the difference between having to wait 10 years between drinks, and being able to go again.

    Also has the added advantage of insulating you against sudden P&I rate hikes.... something no one is placing much value on yet...but should be thinking about as rates head north and P&I repayments get closer.

    In the end, no one goes broke when they earn more than they spend :)
     
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  8. euro73

    euro73 Well-Known Member Business Member

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    Yeah...it's not enough just to be CF+ by a little amount. You need to get better than 1 or 2 K and you also need to reinvest the money with a focus on reducing debt as well... it may well be a slow process, and isnt very sexy, but if you want to build a portfolio over 15 or 20 years, there isnt any other magic bullet available other than big wage rises or a lottery win or inheritence :)

    I run my portfolio as a dividend reinvestment plan. All cash flow surpluses go back into the portfolio as debt reduction.
     
  9. Gockie

    Gockie Unicycle anywhere and everywhere... Premium Member

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    This.

    And not leverage up past the eyeballs. (But dang!!!)
     
  10. Jasper

    Jasper Well-Known Member

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    Does working part time increase or decrease your borrowing capacity?

    E.g. if i earn $80k workinh 3 days a week, is my borrowing power the same as someone who earns $80k working 5 days a week?
     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Borrowing capacity is based on how much you can prove you earn. If you make $80k/yr, it doesn't matter if you earn this working 3 days a week or 5 days a week.

    If you want to increase your borrowing capacity beyond what $80k gives you, consider trying to increase your working week for 3 days to 5 days.
     
  12. Jasper

    Jasper Well-Known Member

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    Thanks.

    Why do brokers ask if I'm part time or full time if it actually doesn't matter?
     
  13. tobe

    tobe Well-Known Member

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    It's mattering less and less nowadays, the question is more aimed at casual and permanent employees. Many lenders still annualised casual income and then subtract 4 weeks cause they don't get paid holidays.
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    One of the ways to determine your income is to look at your hourly rate and multiply it by the number of hours in a week, or hours in a month. This doesn't work if you work part time. Payslips can be quite complicated, there's multiple ways to determine how much you get paid.

    Also the lenders ask the question in their application. If we've got it in our notes it's one less think to think about.
     
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  15. Corey Batt

    Corey Batt Well-Known Member

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    As Peter has touched on - this is the main reason. There are also some lenders which differentiate their policy on employment dependent on the employment type - with Full Time being seeing as the most desirable and casual the worst. This can impact the amount of time you're required to be in a role, how much of your income can be accepted or whether the lender will lend to you at all.
     
  16. Lloyd

    Lloyd Member

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    Apologies as I am learning. What is LIC?
     
  17. Corey Batt

    Corey Batt Well-Known Member

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    I think in this case euro is referencing Listed Investment Companies (ie asx listed trading companies like AFI, ARG, WAM etc)
     
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  18. Perthguy

    Perthguy Well-Known Member

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