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

FirstMac. Actually I should have mentioned Adelaide Bank (ABL) in my post as well, as they have the same policy as FM where they accept 80% of the NRAS credit on 80% LVR deals. However, it's only available on houses and it's only available through ABL funded Mortgage Managers- Pioneer, BMM etc. Still, between FM and ABL, and using NRAS, there are two lenders and strategies that will significantly boost capacity.

Whether or not it whet's your whistle is a different conversation - but it's certainly A strategy that provides a solution to these changes.

 

Thanks

 

You're looking in the wrong places. There are NRAS deals to be had without the premium.

 

What about interest only loans refinancing...hope that would still be around

 

That would be the mother of all blows wouldn't it. Let's hope that doesn't happen.

 

can you explain your serviceability calcs? as i'm a tad confused.

 

i thought you could only buy them brand new from developers / builders?

 

Yes... but that doesn't mean there arent really good deals to be had.

In the past 3-4 months I have assisted clients into

34 x 2 storey, 3 bed 2 bath townhouses in Bunya, at well under 600K. Non NRAS are going for much higher than that.

2 x 2 bed, 2 bath apartments in Canterbury at @ 700K. New 2 bedders in Canterbury are 30-50K higher

5 x 2 bed , 2 bath apartments in Castle Hill earlier this year for 620K each. They are easily at 730-750K now. Settling in 6-8 weeks.

28 x sub 370K Goulburn townhouses - which are my personal preferred types of NRAS as the loan size is smaller but the yields are higher.

27 x sub 400K houses and townhouses in orange. Also right in the sweet spot as far as I am concerned.

6 x 2 bed apartments in Rockingham WA for sub 400K. Again - right in the sweet spot.

There are multiple other examples in NSW . Elanora Heights. Baulkham Hills. Gregory Hills. In QLD - Sherwood, Alderley, Annerley, Cannon Hill, Windsor, Mt Gravatt...

In the case of @400Kish stock ( as listed above ) you generally require only 60K of equity, for a 9 - 10K + tax free return. That's 15%+ tax free return on equity. But that's not really very important. What is important is that you are generating the equivilent of @ $800 extra tax free dollars per month which you can redeploy towards other uses. Open a mortgage repayment calculator . key in your mortgage. key in your interest rate. key in $800 per month extra repayments - you'll quickly see what the surplus cash flow from just 1 x NRAS will do to a PPOR mortgage.

But that 1 x NRAS will also produce @ 18-20K of deductible losses. So if you had the capacity to purchase 2 for example, you'd achieve 2 things straight away;

1. 36-40K of deductible losses and
2. 18-20K of extra tax free income. Now calculate what that will do to your PPOR mortgage.

If you have the capacity to purchase 4 for example, you'd achieve

1. 72-80K of deductible losses
2. 36-40K of extra tax free income... Now calculate what that will do to your PPOR mortgage.

Now consider how that stacks up in a constrained credit environment....

As I said. There are countless examples - you are looking in the wrong places

 

I think it would be prudent to move against that possibility now where you can.

 

If you're not in a position to go with a bank with 10-15 year IO periods, what options do you have?

I'm renewing all my 5 year terms, getting as much equity as I can to weather the storm, then saving as much as I can. I am also buying some international ETF's as a hedge against the declining Australian economy. That's all I can think of, and then hoping in 5 years I emerge OK. What other risk mitigation strategies should we be considering?

 

How long do you see the deals being around for? why are they selling less than non NRAS property?

 

I dont think you need to think that extremely. I would think 5 year I/O extensions are a good place to find yourself. There's only so much planning you can do. Sometimes you just to have to sit and re-set. While I consider the APRA changes to be serious and believe they will lead to material changes in the short -medium term, it's not as if lenders are all closing down and refusing to lend. It's just a case of recalibrating where you can, setting some buffers in place and waiting to see how these changes impact things. I would be very surprised if 5 years from now, APRA is still unsatisfied with the banks efforts at rebalancing their books. I would imagine the greater risk for renegotiating or extending I/O terms is the 12-18 months horizon from now, rather than the 5 + year horizon from now.

It's likely that the changes to how banks assess capacity will remain permanent, and treating debt at "actuals" will probably not come back any time soon, but I think once APRA is satisfied that sufficient rebalancing has occurred, some of the other tightening you're seeing at the moment will relax.

 

Lol thanks

 

The opportunity to purchase NRAS is fast running out. There is less than 12 months to work with before all remaining Round 4 allocations have to be activated. Subtract time for putting an effective cash out and borrowing plan in place, which often requires refinancing/restructuring before starting acquisitions, then allow for time to purchase and settle, and the window is closer to 6-7 months in reality.

As for why I have been able to put together deals without inflated pricing - that's just a result of extremely careful project selection and working very closely with vendors/developers to get the deals right.

 

ASIC has done some work on the sidelines with APRA.

Note ASIC oversees all financial institutions including non-bank lenders that are not under APRA.

ASIC chairman Greg Medcraft… [said a] probe into the underwriting standards of a sample of 11 financial institutions had uncovered unacceptable practices.

“What we are seeing in some areas is that clearly the interest rate that some are using is too low in terms of the level,” ... Read more: http://www.theaustralian.com.au/new...ending-standards/story-e6frg6n6-1227463924936

 

Euro's got some pretty handy stock, i and several mutual clients have been very happy with his services. Pretty useful go to guy for NRAS, given NRAS can be a pain dealing, you'll need a bit of resilience to wade through the dodgy deals, poor quality stock, and frustrating sales agents who have no idea what they're selling.

As an aside, there's a growing secondary pool - some frustrations from late NRAS payments last year has meant a fair increase in the supply of pre-existing NRAS's on the market. Can get away from the 'new premium' but will trade-off on a few years of NRAS grants which can be pretty valuable.

Will need to do very thorough due diligence here - trying to unpack why the owners selling as its generally a 10 year play.

Cheers,
Redom

 

@Till Kingdom Come - thanks, great post.

Any idea HOW they look at those lenders compared to APRA?

APRA did some great analysis by getting a host of serviceability calculators and policy guidelines, then matched and compared a serious of lenders results under certain scenarios. Obviously a good way to unpick the differences between the investor friendly and not so investor friendly lenders - as the variances would be huge.

Given APRA's specialisation, i would have thought ASIC would stay one or two levels above such detailed analysis and look at overall lending frameworks to tinker and tighten - e.g. NCCP regulations, (what they normally do, etc). If they stick to this type of approach, i'm not sure they'd be able to unpack it all at such a detailed, individual institution lending policy level, as APRA have done.

Cheers,
Redom

 

I think this is exactly what ASIC can do. NCCP gives them a massive amount of scope to almost dictate lending policies to individual lenders on a case by case basis. I'm not sure if they can tell lenders to reduce their investor to owner occ ratios, but they can review policies which favor investors and make lenders pull back on these policies.

Many of the policy changes we've already seen have been of the nature where they do appear to be NCCP related as opposed to fiscal policy. Increases in assessment rates, adjustments to living allowances and similar are all reviewed via NCCP. Responsible lending can become a very powerful argument.

A key feature of NCCP is that it is scalable to the organisation under review. That's useful for the smaller brokers, but it gives ASIC a lot of power over groups who are funding home loans. It does lead to some speculation however that even brokers may need to start reviewing policies at an individual level (unlikely, but not entirely out of the question).

 

Umm ASIC is more powerful than you might assume.

Under extraordinary circumstances and in coordination with the other regulators RBA and APRA, one must not assume they will stick to their old approach, if they have the legal powers to make a more detailed investigation.

And Mr Abbott the Great PM just ordered the audit of ASIC's capabilities. They will be pressured to show some muscle.

 

While there are options still available for investors seeking 'actual repayment' calculators, these options are considerably less flexible policy when compared to some options that were on the table in the past.

One area where flexibility is lost is employment histories with the three mentioned lenders in the OP. Previously one could go to NAB and take your 1 day employment and get deals over the line at actual repayments.

Now the three lenders mentioned have considerably stricter employment policies - so obtaining approvals with short term employment can be trickier.

FirstMac

12 months in current role, Full time and Casual. May get away with less, but wouldn't bet on seeking an exception if you're going to them for servicing reasons.

HL Classic - they need insurance at all LVRs and this can lead to 'risk based' assessment.

Full-time, Permanent part-time or contract employment

• Minimum 6 months in current position OR 12 months continuous employment in the same industry. Probation may be considered.

Casual or Second job

• Minimum 12 months in current employment

Pepper

Full-time or Permanent part-time

• Minimum 6 months employment with current employer AND minimum 12 months continuous employment within same industry

Casual, Contract, or Second Job

• Minimum 12 months with current employer

Can seek other products in Peppers suite, but comes at a higher rate (near 6% mark at 80).