Investor Finance: How to Maximize Your Borrowing Power

Haha - no not them thank goodness. Would not be able to do it with them I don't believe.

 

Haha what an awesome way to put it. Agree debt reduction will play a larger role.

Agree - there's no doubt that capacities have been contained. One look at the chart shows a massive difference between the highest capacity & the pack. Many operated near the top of the charts a while ago, while the 'pack' was about 20-30% higher.

How it plays out at a market level & what property investors should do with this credit information is up for interpretation. A couple ways to think about this:

1. The 'credit' is scarce, focus on growth view:

• My personal view is that investors should respond by maximising the leverage opportunities available from a 'scarcer' borrowing capacities. As shown in a previous post, rental yield doesn't make magically make these calculators flip in your favour, they'll still have relatively sharp downward gradients as debt size increases. This shifts focus, IMO, to ensuring your leveraged debt is producing growth outcomes for you. Security subs, switching from low growth to growth markets, value adding, etc - all become more important and sustainable in this credit environment.

2. The credit is scarce, growth is harder to come by, focus on yield view:

• On the flipside (the yield argument); i too can't see how long term growth levels can sustain in a drier credit environment too. If people can't get as much money, prices can't grow as fast. If thats your assessment, perhaps its better to generate your return in other ways, e.g. cash flow. At least theres a greater 'certainty' to it & its real. You'll soak your borrowing power up this way, but you will be making a return that can be quite healthy (e.g. dual occs, nras's, high yielders, etc).

Nonetheless, my reading of markets is that their imperfect and prices take time to adjust. It therefore means there's good buying ops somewhere in the country & demand dynamics are adjusting. Hence i take the first view - IMO if you put money down in the right places it'll trump return profile of putting money down with yield spectacles on.

 

In general differences between APRA calculators are marginal at best. Also for investors, the main issue is that they treat your debt in a very similar way. Income has always been relatively consistent between lenders & hasn't been the biggest difference maker between calculators.

Re CBA, as Pete's mentioned, there's plenty of cases where the outcomes produced will be lower than others. The marginal difference in their calculation of OFI offers scope for specific types of investors to utilise (P&I low rate investors). Also since posting, Liberty has drastically cut back too (today), so that outlier is far lower than previously.

 

so what have liberty done exactly? are they still any better than the other banks now?

 

They've changed how they calculate living expenses, it's a significant increase which does reduce borrowing capacity.

They're still way ahead of other lenders.

 

Is there any general guide as to how much of a borrowing capacity decrease this may have?

 

Based on the scenario ran on this model:
- 950-980k borrowings.

Thats roughly a 100-200k drop in capacity, depending on the amount of income one is earning.

 

@Beyond Wealth & @adam duckworth - we remodelled the same scenario for Liberty, Westpac & St G who've all had calculator changes in recent months.

Updated chart & breakdown in this article:
How to Finance a Multi-Million Dollar Portfolio in One Picture - Smart Property Investment

Noticeable changes:
- St G not the best mainstream borrowing capacity for first time investors anymore (neg gearing add back changes)
- Westpac big drop down (APRA changes to their calculator)
- Liberty has come down about 200k. The impact is bigger for those that have rental income (HEM scales with rental income).

 

Great post and info @Redom

Pre APRA/ASIC I could convert 70%+ of inquiries form property investors and now more like 10-20% and same amount of work involved.

Add in decline in vals and people sitting on their hands (in Perth anyway) an it makes for a tough business environment.

Tough times breed tough people.

 

@Redom thanks heaps for that!

so are you saying that someone borrowing again with say 5 properties, with a rental income, their borrowing power would be less than someone with no rental income (with liberty)

 

@Redom don't worry just understood what you meant

 

Rental income will still help but not as much as previously.

 

Now with these foreign lenders coming into the market next year (ones from China and England, just saw them on the tele, totally online lending).

Won't that mean lower interest rates for borrowers and therefore more borrowing capacity and therefore a continuation of higher Sydney property prices.

Especially around Mt Druitt where firsties can still get a 100% discount on their stamp duty. Gawd bless Gladys. Lu ya! lol

 

the changes in Living expenses ( which linked to postcode and income) with Liberty have great impact on investors who have higher income and living in "expensive" areas.

 

So they are taking it as, if you earn more money you spend more?? (Which isn't true) so if you work hard and earn more they end up reducing your serviceability through a stronger HEM any way?
What if you earn good money but actually don't spend any more than normal and are still
Living in a cheaper area? Will they even take this into account?
Am I looking at this correctly...

 

Actually for most people, it is true. The more they earn, the more they spend. Sure not everyone is like this, but it easily can be applied to a statistical majority.

I've met plenty of people on low incomes. They watch every penny and spend very little. I've met people with high salaries who can't figure out why they're going broke.

The HEM tables used by lenders do take into account location, although it is fairly broad. Westpac's is based on the state you're in and if it's metro or regional.

 

@adam duckworth - they're scaling living expenses based on income. The reason why investors with portfolio's are losing a little bit more than new investors with their calculator is because rent is considered income.

 

Latest IIS report shows it is a tougher environment today than previously - given western location, even tougher still. Not sure if potential remuneration changes will add further downside risk too.

More broker numbers, similar loan volumes = drop in relative incomes across the board. Positive to see the % of broker loans remains strong.

Broker boom ‘unsustainable’, warns MFAA CEO