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I'm a little confused working out borrowing power

Discussion in 'General Property Chat' started by Dan Donoghue, 30th Nov, 2015.

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  1. Dan Donoghue

    Dan Donoghue Well-Known Member

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    I can't seem to get my head around this.

    If I owe X against a PPOR worth Y how do I work out my borrowing power? ie how much could I consider spending on rental properties?

    If I can then prove an ability to pay Z per month does that alter the borrowing power or is it purely based on equity?

    For the purpose of this lets say PPOR is worth 500K with 100K owing (not real figures).

    Then if we reproject 500K with zero owing and an ability to fund 4K per month in repayments above any rental return, how does that factor in?

    Thanks for your help :)

    Dan
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Its just based on LVR which is simple maths
    80% LVR:
    500k x .8 = 400k Minus 100k owing gives 300k equity out. Use that 300k as deposit on 1.5m worth of property (ignoring stamp duty and fees for simplicity)

    90% LVR:
    500k x .9 = 450k minus 100k owing gives 350k equity out. Use that 350k as deposit on 3.5m worth of property (ignoring SD and fees again and LMI too)

    Whether you can actually afford that in the banks eyes is a different question all together and one that you'll need to discuss with a broker. There's too many variables regarding your income from work and rents, your expenses and liabilities etc. Even then, each bank views them differently.
     
    Last edited: 30th Nov, 2015
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  3. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Thanks for stepping it out @D.T. :)

    So I can use your methods for a basic analysis then when I get in touch with a Broker I will look like I have some sort of idea what I am talking about lol :).
     
  4. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    @Dan Donoghue - you definitely need to be able to "afford" the new borrowings, yes.

    To add to what DT said, I use the rule of thumb of 5% for purchase costs (stamp duty, solicitor fees etc) so when you know how much equity/cash you have, add it up (call it CASH IN) then use the following formula to work out your maximum purchase price depending on how much you want to borrow:

    80% lend: CASH IN / 25 * 100 = purchase price
    85% lend: CASH IN / 20 * 100 = purchase price
    88% lend: CASH IN / 17 * 100 = purchase price
    90% lend: CASH IN / 15 * 100 = purchase price
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Lenders look at 3 things
    - deposit
    - serviceability
    - credit worthiness
     
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  6. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Thanks guys, much appreciated.

    So who do I talk to about goals to formulate a plan? Is that something I talk to the broker about or do I need some other person for that?
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    The amount of free cash you have per month is the main thing banks look at in terms of servicing, however they do differ slightly in what they'll lend based on that, and also the methods they use to determine exactly how much spare cash you have.

    If you're looking to access equity from an existing property, it's as DT mentioned above. The thing is, you need to be able to service the borrowed equity with your spare cash, so it's a combo of both factors rather than just equity.

    In terms of goals, you can definitely speak to a broker about that.
     
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  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You need to factor in the ability to borrow together with your goal of buying property so a broker is a good start.
     
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  9. D.T.

    D.T. Adelaide Property Manager Business Member

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    Plan comes mostly from yourself. As in, what do you want and why are you here?

    An excellent question to ask your broker is: if I buy this property that's worth X and rents for Y, how does my serviceability look for the subsequent property? Or how many lots of X can I afford?
     
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  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    First you need to work out why you need a plan, and what sort of plan

    Financial Planner, Accountant, Broker, Life/Money coach, Mentor

    the qualification really is that they have a good understanding of getting from you what YOU want, and they can then connect that to your resources using a bunch of other people in the industry to map to your destination.

    Quite simple really. but not obvious

    ta
    rolf
     
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  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Realistically you can't figure out your own serviceability, it's just not that simple.

    The examples already provided are based on some simplistic rules of thumb, they're not even remotely accurate for various lenders and different scenarios.

    If you have done your own budget factoring in a 2% rate rise across your portfolio and you still feel you can afford the loan, then a decent broker can probably find a lender to accommodate it.

    Projecting affordability beyond that point is reasonably straight forward with the right tools, but again not a simple thing that can be done with a pen and paper.
     
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  12. Redom

    Redom Mortgage Broker Business Member

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    This. These are great questions to ask yourself and any broker you deal with.

    Its definitely best to form an idea of what you're looking to do yourself - if you seek professional advice, your likely to get the most out of it if you know the information your looking for. Your broker/adviser can lead you with lots of information that you don't know, but having an idea about your plan and what your looking to achieve can really assist the broker in delivering to your needs. Its about getting to know you, what your looking to do and working out strategies to get there.
     
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  13. Dan Donoghue

    Dan Donoghue Well-Known Member

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    OK So I think I am getting the idea now, so to get myself a professional who can help me get the ball rolling and fill in applications etc, is there a list of good and bad people to use? I know my goals and I know my key finance factors. The only thing is its going to be about 6 months before investing to get my health back on track. I am sort of using the excitement of what I am "going" to do to keep me focused on recovery :).
     
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  14. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Lots of great brokers on here @Dan Donoghue. See who you feel would be a good match :)
     
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  15. MsAli

    MsAli Well-Known Member Premium Member

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    We use this formula and find it simple...Similar to what you would have gathered.

    Deposit of x% + 4.5% for purchasing costs. E.g.
    * 88% LVR would be 12% deposit + 4.5% purchasing costs --> 16.5% total cash input
    * 80% LVR would be 20% deposit + 4.5% purchasing costs --> 24.5% total cash input

    **purchasing costs to cover stamp duty, solicitors fee, B&P**

    If you have.....
    - 50k for deposit, at 88% LVR = 50,000 / 0.165 --> 303k purchase
    - 100k for deposit at 88% LVR = 100,000 / 0.165 --> 606k purchase

    Similarly....
    - 50k for deposit, at 80% LVR = 50,000 / 0.245 --> 204k purchase
    - 100k for deposit at 80% LVR = 100,000 / 0.245 --> 408k purchase
     
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  16. Arashi87

    Arashi87 Well-Known Member

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    Correction: @ 88lvr we need to pay lmi compare to 80lvr ... So purchase cost is not fixed at 4.5-5% all time ;)
     
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  17. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It's not out of pocket though so not something you need to budget for as such. :)
     
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  18. Arashi87

    Arashi87 Well-Known Member

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    My bad
     
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  19. jpcashflow

    jpcashflow Well-Known Member Business Member

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    Hi,
    Keep things simple get in touch with a broker and let them provide you with the information.
    Focus on planning and achieving your goals and let the experts work there thing.

    Borrowing power / capacity a few other fundamentals to consider. eg; existing Hecs Debt, dependents, married, single and what other assests / liabilities you have.
     
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  20. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Thanks @jpcashflow, I called @Steven Ryan and he has kindly agreed to be my broker on this :). We are in a fairly fortunate position having only a small amount left against our mortgage, no kids, no other debts. We currently only have the PPOR but it is worth 750+ and with less than 100 owing on it, Steven sounded almost as excited as I am to help me on this journey :). It's going to be fun and a lot of learning for me :). The only thing holding us back currently is my health, this will be fixed within 6 months then I plan on being fairly aggressive under Steven's guidance (providing I can convince the wife that large negative bank numbers don't really matter when you have the asset to cover it :).

    I plan to retire in 10 years (age 50) to the beaches of QLD with a passive income to replace my working one, a stretch goal is to work in a new car every 5 or so years and a nice O/S holiday each year, I don't need to be a rich man but I do need to be a comfortable one :). This I have learned from my recent health scare, what's the point in burning myself out until Age 70 if I don't get enough days to enjoy it :).

    We currently drop 3K a month on the mortgage and 1K in the offset, I am comfortable to continue to do this over and above any rent we receive from the tenants over the years. but who knows, Steven may have a better plan for me :).

    Edit: Damn I never realised how many smilies I use until I posted this lol.
     
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