How to grow a multi-million dollar portfolio on an average income in the new lending environment

A few months ago I posted information about how investors can utilise finance strategies to really stretch out their borrowing capacity and grow large investment portfolios with average salaries (see SS thread: http://somersoft.com/forums/showthread.php?t=106722),.

Since then, APRA have come down with their heavy stick and directly targeted this approach. They’ve effectively made the majority of lenders reduce the amount they’ll lend to investors. Its been talked about a lot through these forums, but the main way they’ve changed the game is:

• Previously certain lenders (NAB, Macq, AMP, ME, etc.) took the actual repayment (say 4.5%) you paid on your mortgages with other banks into their calculator. They now apply substantial buffers on top of those actual repayments into their borrowing calculator. In my last thread I talked about how to use this to investors advantage as one of the key principles to grow portfolios.
• Getting certain lenders to apply higher buffers on debts you have with them.
• Applying higher interest rates to investors.
• And more recently, applying LVR restrictions on investors.

The majority of these changes have a direct and tangible impact on investors borrowing power. With the dust now settling on these changes, where does this leave investors looking to grow their portfolios?

The good news is that today it is certainly still possible to grow large portfolios on average incomes. In short, you can still apply the same strategies I mentioned in my original post, but now you’ll need to go to new lenders (non APRA regulated lenders). It may be harder, there may be refinances involved and the costs of doing business may have increased marginally, but it is still possible to stretch that borrowing wall out into the distance.

The solutions of yesterday may not apply to today’s problems. It just means that it’s our job to find investors new solutions (sorry APRA!).

There’s a silver lining to all of this too. Most of the new lenders that investors can now go to, they would never have thought of going to before. That means there are viable options where you can go to a new lender and have ALL of your existing mortgage debt treated at the actual repayment you pay. So long as your yields are reasonable (20% above the interest rate you pay), you’ll have your borrowing power effectively refreshed to when you had no mortgages.

For example, if you have $2million in debt with one of the previous actual repayment lenders, they and MOST lenders will take that debt at a considerably higher assessed buffer. E.g. Macquarie, one of the investment leaders of the past, would take ~$159,000 in your yearly repayment. The new lender will take that same repayment at ~$90,000. That equivalent to reducing your expenses by ~$70,000 a year (or increasing your income by over $100,000 p.a.!)

By switching to a non-APRA regulated lender, this calculation difference can make a massive difference to your borrowing power and allow you to keep purchasing.

In summary, if you’ve believe you can no longer borrow because of the APRA changes, you are likely to still have options.

 

Given the length of this post, I’ve split it into two with the nitty gritty below:

1. Under the new lending conditions, is it still better to go I/O for my borrowing power? I’ve heard that going P/I is better given the lack of ‘actual repayment’ lenders.

With the adjustments to borrowing power calculators, P/I repayments will likely increase your borrowing power with the individual lender that’s in front of you for your next transaction.

However, for investors looking to grow a large portfolio, you’ll need to look well beyond your next transaction and closer to your end goal.

With that in mind, I’d recommend I/O to investors looking to build beyond what individual APRA regulated banks tell them they can borrow.

Simply, you’ll have to go to actual repayment lenders sooner or later if you’re looking to grow a portfolio.

Your borrowing with the APRA regulated lenders is limited and much more closely tied to your salary than before. Once you’ve passed this point, your options to switch lenders to alternative APRA lenders is quite limited (all take buffers, some buffers are larger than others).

Therefore you need to keep your ‘actual repayment’ lower to maximise your ability to leverage from the non-APRA regulated.

2. Which lenders use actual repayments?

Over the course of the last 6 weeks, I’ve used the following three with success. Other brokers can input here.

FirstMac:

Pros: Great rates, 10 year I/O, great servicing calculator.

Cons: Cashout requires evidence, a little unpredictable when it comes to the really serious investors (soft ‘rent reliance’ policy).

Experiences to date: I’ve had half dozen deals with them last month, so limited evidence from me. Pretty good at the 80% space. They’ll send anything over up to the insurer though. @euro73, thank you for your great posts on them, they’ve been great for the SS/PC community.

Homeloans Classic

Pros: 24 hour approvals (I’ll miss this!), great logical credit team, finds a way to say yes (very important!), great rates too.

Cons: Higher assessment rate (8%), $1mill max security value, max $100k cash out, 70% rental income.

Experiences to date: I’ve dealt with them regularly over the last 6 months, Homeloans have been the best non major I’ve dealt with and I suspect will begin to grow in market share over time (new Macquarie!). As brokers we’re always trying to manage risk and having some consistency is great.

Pepper Home loans – Not so great going to a non-conforming lender, but it is an option that is available as they take actual repayments and have a useful calculator.

Pros: 85% no LMI option.

Cons: Potential credit file impact with Pepper.

I’m sure there’s more out there if required (there’s a few private funders available, but only used in desperate situations given the costs). I’ve used these solutions over the course of the past month without much of an issue for my existing clients.

3. How long will these solutions be out there?

I wish I had a crystal ball on this.

They’re not in APRA’s purview, YET. They’re likely to be too small to care about, but I’m certain that APRA will know that they’re actions will lead to a shadow sector effect. How much they’ll care about it – not so sure.

I’m confident the savvy investment brokers can find more solutions too so long as its regulators trying to change the landscape and not the market.

My time as a policymaker taught me that regulators are usually always playing catch-up.

4. What will happen next?

Again, can’t say anything for certain, but I’ve posted on my thoughts on APRA’s next moves here: https://propertychat.com.au/communi...changes-in-2015-looking-ahead-whats-next.311/

5. What about all my other existing debts with other lenders?

If you’ve got equity tied up that you want to release but are stuck because of servicing changes, you may want to explore your options with some of the mentioned lenders or alternative solutions.

I’ve started advising my clients to prepare for potential changes if they cant rollover their I/O terms. So that may be worth considering. More on this old thread here: http://somersoft.com/forums/showthread.php?t=108515

 

The question is - how long will these lenders continue taking OFI repayments at actuals?

Personally - I can see them following the same path as the other lenders at some point. For now - they'll be getting more of my deals.

Cheers

Jamie

 

For WA clients P&N still use actuals too. They also insure over 80%, but are a good option for those WA borrowiers thinking of Firstmac, who insure everything in WA over 70% LVR.

 

From your guys experience Pepper and FirstMac are only 2 taking actual repayments? What LVR are they going up to for investors?

 

Pepper 95% ( Best to stay at 85% for rate )
Firstmac - 90% ( but u want to stick with 80 with firstmac)

 

Pretty sure Pepper use a risk fee (not Genworth) - so there may be a little more flexibility on that front which can be handy for investors looking for funding. I've had a couple borderline deals that i'd be pretty uncomfortable going to Genworth be approved by Pepper (high LVR, casual employment, 150% rent to salary).

Rates rise based on LVR and the risk fee can get pricey - so there's a price to pay for the funding but flexibility comes at a cost.

Cheers,
Redom

 

Great thread Redom.

In this context, what would you consider to be an average income?

 

Thanks for the response guys. Looking to do 90-95% lend for an approx $250k purchase. What sort of rate would I be looking at for pepper & firstmac? Also, why is Firstmac bad over 80%? Rate as well?

 

+1 Thanks for the info Redom. Always get some invaluable info out of your threads.

 

You couldn't do it with FM as their max in 90% inclusive. With Pepper you'd be looking at about 5.5% from memory.

 

Can avoid LMI altogether with Pepper and get rate much lower at 85% LVR - definitely worth considering if its a live option.

 

Thanks @miximitosis and @MindMaster - glad its of use.

I just meant anything below 200k and a general income bracket (35-200k) thats the majority of investors would fall into.

As an example, I've got a young few clients on <40k a year crossing the mill mark and getting approvals post APRA (same example as the Pepper example i mentioned).

Cheers,
Redom

 

But don't other lenders assess as if P/I anyways?

 

They will on the debts you have with them or are looking to take out with them (as part of their own assessment rate).

The debts you have with OFI's, the mentioned lenders will take the actual repayment you pay not the P/I repayment.

Cheers,
Redom

 

Also, from memory on all the actuals calculators, they don't reduce the loan term based on length of I/O periods.

So many of the majors calculators will assess the loan term at 25 years if you've got a 5 year I/O term.

Some of the mentioned lenders don't do that. They just assess at 7-8% P/I over 30 years on their debts, and actuals on OFI.

Cheers,
Redom

 

What is macq like for cash outs at the moment >90%?

 

Above 90%? Forget about it.

 

Woops Sorry meant below, 80-90

 

The bottom line is - if you have reached capacity with "branded" lenders and want additional capacity, unless you are willing to move deals to lenders mentioned in this thread, you will be going no further in your investment journey without selling off assets or securing a big pay rise, inheriting money or winning the lottery. There are no short cuts. There are no clever back doors. There are no options but to use the last 2 or 3 non banks who take actuals, until that well dries up at some point too.