How to maneuver the changing banking environment

Hi.. i have a few properties and i'm looking to get more. but like everyone else the banks are becoming harder to work with these days. to share my numbers, i have:

• 3 low value properties a little way out of sydney
• LVR of 68%
• Yield of 5.1%
• The folio is about 0.6% positively geared after all expenses.
• i also save about 60-70% of my after tax wage.

from my perspective i have plenty of extra cash flow. even if the interest rates were at 7%. The problem is brokers say the banks are accessing my like i have very little money available. the loans amount that they are suggesting is very low. i could make it work for another place, but the only banks that will lend are offering 5.5% interest only

I have 2 loans coming off there fixed term in the the next year and i want to refinance them to continue to be interest only. I also have a good deposit saved up for another purchase. My worry is that the banks are already assessing me as high risk and getting another property could restrict all my folio to second tier lenders that have easy lending criteria but much higher rates. i don't want to be stuck paying crazy rates.

so in essence the delemer is... do i keep saving for the next year and take care of my refinancing. or should i go for another property and risk restricting my options with the banks.

 

What about if you save some more, go for a lower LVR lend and use the rent of the new IP towards servicing the loan. This is a strategy I need to talk to my broker about. A bank may not lend at an 80% lvr but may lend at a 60% lvr (for example)

 

One of the problems many investors kind of bring onto themselves is they release equity for the next purchase. Releasing equity is also an act of increasing debt, further restricting additional borrowing capacity. Properties often never have the chance to become positive cash flow and self supporting.

So why not do both? Save the deposit for the next property. Actively work to pay down debt. If borrowing capacity is becoming a problem, work towards ensuring you don't need to borrow as much, but also keep investing when you can.

Just make sure you understand what the best way to save is for your circumstances. Usually this means saving/debt reduction via an offset account, rather than directly paying down loans.

 

From a future planning perspective patience is going to win the day. There is no point buying more now, only to have your whole portfolio with suboptimal loan structures and lenders in 12 months.

If you are desperate to buy more now, look at breaking your fixed rate on the existing properties and restructuring them now so you know they're all good and with decent lenders for the next 5 years.

 

good point.. my strategy is to hold long term. i'm trying to build a folio of around 10 properties and build it in a way that will always allow me to get another property every few years. ideally the only reason i would sell a property is if its a non performer. i don't want to get stuck because of financing / servicing issues. which is why i have the folio positively geared.
the end goal would be to have a folio that could be lived off, mostly through passive income, but i also don't mind subsidising that by living of the equity in a conservative way as well.

regarding starting a business i've already done that. thats how im achieving such good savings now. i work a full time profesionala job and also do contracting in my spare time.. i can generally save another 20% deposit in 18 months.

appreciate the comments thanks

 

cheers Peter.. just to clarify to date i have only purchased with savings and will continue to do so for at least the next 2 properties.

LVR on the folio is 68% but including my savings that takes it down to about 57%. i definitely agree with your point, i'm not a fan of paying down the loan, its all sitting in the offset account.

 

@PandDos it's quite common to read people say I want 10 properties by X but as I always say, don’t focus on number of properties because it is TOTALLY irrelevant.
Why do you invest? If the answer is anything except for money then your not investing, you just have an expensive hobby. So if money is the end game then what difference does 1 or 10 make if they deliver the same outcome? I would argue with property, less is more.

But I reckon you invest for money . So based upon that my first focus would be on my current stock before I worry about anything else. How are they performing, what is their future outlook like? All reports indicate Sydney is in the start of its decline so how is the ripple of this looking to effect your outer properties?

The answer to your question may be to sell a property with a poor outlook and buy into a new area just starting a fresh cycle. No doubt you enjoyed a very good run with these properties.

I know it’s easy to just focus on the costs but you also need to consider lost opportunity. The costs also might not be that bad. If you lived in one of these but haven’t owned a PPOR since then the costs may be some small exit and re-entry fees without any CGT.

Honestly I would hit up one of the brokers on here, Those that have replied are all guns. They may be able to give you some insight into your options.

 

Unfortunately @PandDos , you find yourself in an increasingly common situation that many here also find themselves in, or will soon enough.

Here is the cold hard truth. This applies to everyone in one way or another, really

1. Equity has no value without the borrowing capacity to harvest it - unless you are selling.
2. You need to reduce debt, or increase income ( significantly) or both.
3. Parking money in offsets is not reducing debt. It is reducing repayments. While you are loathe to do so, your borrowing position would improve by paying down your loans instead of offsetting your loans
4. Your yields are 5.1% and you are 0.6% + on your "hip pocket" calculator. But lender calcs and hip pocket calcs stopped having anything in common in mid 2015. Most lender calculators require you to be generating a 10% yield ( or thereabouts ) just to be considered CF neutral Problem is - even if you have that sort of yield , most lenders cap acceptable yield at 6% .

The only lenders who are remotely "old school " and with whom you have borrowing capacity are the Pepper's and Liberty's of the world. As you have discovered, they can price their product as they wish becaise they have a niche. So you can either take their money on their terms or you can accept that the only way forward (without selling) is debt reduction or significant income increases - or both

You may get lucky, but most borrowers probably aren't going to get IO extensions while the 30% IO quota is in place. There simply isnt enough space within lenders caps to provide IO to all who want it. Priority will go to new business. Investment portfolio's really should now assume that 5 years IO followed by 25 years P&I will become , and will remain , the model they are going to be required to operate/hold properties under. This means dealing with repayments increasing by 50%(ish) after the loans revert to P&I. Again, you may get lucky and avoid this.... but very few will, and if you dont get lucky and don't avoid it, you should be prepared for the seismic shift in repayments. yet another reason to turn your attention to debt reduction rather than further accumulation.

I'd be putting the cue in the rack for a while and focusing on a few solid years of debt reduction. That means debt reduction, not offsetting You'll come out the other end in a few years time, better positioned to grow your portfolio and HOLD it.

 

Point 3 deserves underlining.

 

Impossible to advise not knowing your whole financial and personal situation but just few other things to consider:
- Have you thought of investing outside of Sydney, in other states so perhaps lower entry costs and borrowing as opposed in Sydney?
- Have you sourced your loans from other lenders, holding with one financier often restricts you growing your asset base, and helps with cross collaterising and cross securitising?
- Have Plan B and C, buffers in place, like offset accounts, or extra income you can derive, or even pulling out the equity now, to buy you extra time in the market?
- Remember the number of IPs is irrelevant it should be what asset worth you plan to build to in $ terms, how much you need to hold and what is should deliver in the end in terms of CG and yield, hence this can be achieve with fewer or more IPs, not necessarily 10, right?
- Let the market dictate when you duplicate rather than think you need to do this every X number of years, especially since you do not pull out equity to duplicate. Perhaps, increase deposit to 30% instead of 20%, so modify your investment strategy?
- Can you add equity in your existing IPs via minor cosmetic Renos, or covert to more Bedroom whatever the demographic for the area to increase rents? Or perhaps to add a granny flat, suggestions only....?
It is not about just your income, if you can manufacture equity or increase rents that may help to BUT you must know what you are doing......!
Worse come to worse you just hold for few years....then duplicate if in better situation and only you can truly answer that question, you need to be comfortable.
Remember Warren Buffett said, "“The difference between successful people and really successful people is that really successful people say no to almost everything.”
Sometimes it is ok to say no, don't beat yourself about it!

 

Very pertinent comment about highlighting the difference between debt reduction and offsetting.

 

The whole game is about borrowing power and then holding power ( 5 years later) nowadays. I know there are some commentators here who got silver spoon starts and are now operating at a level that immunises them against this stuff, and continue to advocate pre APRA strategies. But most mere mortals reading these forums need to smarten up and realise whats happening post APRA. People say that we should never say never... and I guess that's true because you never know for sure... but it's 99.9% certain now that you cant build or hold a multi million dollar property portfolio anymore on anything less than several hundred K of income, without active debt reduction forming part of the plan. There's a 0.01% chance APRA may reverse everything they've put in place since 2015...so I guess its possible I'll be wrong. But I don't think so.

So if you aren't on several hundred K, debt reduction is your best chance to BUILD and then HOLD the portfolio and eventually ADD to the portfolio. Otherwise, just like our OP, who has run his portfolio in a disciplined fashion and is at 68% LVR with over 5% net yields, there's just going to be no getting past property #2 or #3. This is why I'm such an advocate of cash cows for dividend reinvestment. Because equity from growth gets you nowhere unless you sell. But equity from debt reduction does get you somewhere without needing to sell. May not be fast. May not be sexy Damn effective though. pays off debt and leaves you with a passive income stream for life. A turtle, rather than a hare, if you will. And we all know how that worked out

 

the offset is against the loan so it is a form of (temporary and unbinding) debt reduction. but unfortunately the banks don't recognise it (for good reasons).
that being said I do fear your suggestions might be the inconvenient truth of the new lending environment.
my problem is not P&I. i have no issue paying the loan down. my problem is that i will be paying it down with taxed money and it can't be retrieved for personal use without selling. When i do get a PPR, i'll end up with a bigger personal loan and much lower investment loans that could otherwise be tax offsets.

@Ekin200 do you think i made a mistake not buying in a trust. from what i understand you can loan money to your trust and then retrieve it at a later date. the refinance (within in the trust) to repay the loan would remain for investment purposes and fully tax deductible.

 

Option 3.

Stock Market

 

lol thats where i got my house deposits... i'm actually transitioning away from Shares. It would seem the market only has limited potential at the moment. if you disagree id be interested to get your reasoning. cheers

 

Yeah its tough. Common conundrum for an increasingly large number of people, I'm afraid.

Pre APRA you could kind of have your cake and eat it too. PPOR + investment properties. Use IO and offsets without killing your servicing, etc etc etc.....

Post APRA, most people find themselves having to compromise in order to advance. As you said, its the inconvenient truth of the post APRA era.

This is what APRA wants though - P&I and debt reduction. Thats how they aim to de-risk the banks balance sheets and make them "GFC proof/Credit crisis proof" All the regulatory policy levers have been set to drive those outcomes.

So in the end - if you dont reduce debt (repay it, not offset it) you may never get a PPOR - unless you get a big increase to your salary or sell the INV portfolio - which I take from your comments is the last thing you want to do, as in 15 or 20 years that income stream will be your retirement income.

Sometimes you just have to take one step backwards to be able to move forward.

 

depends what your end goal is.. no matter property and shares both are cyclical, but share grow so much faster and much more liquid than property especialy at this time. i am sure you already know that..power of compounding !


i am like you in some ways, i have properties and shares.
and at the moment i am doing nothing.. sometimes the best thing to do is to do nothing.

 

I haven't read the thread so forgive me if given above.

I would suggest pay off main residence debt asap, then debt recycle this into investment loans. Extend this loan to 30 years.

Consider changing all up loans to PI and bring back to 30 years.

Keep saving in an offset too.