Loan Servicing: Many cannot Qualify for what they have

Good advice here

 

I guess it depends on what you do for work. I work on great projects, move every couple of years to somewhere new, do a different one and meet plenty of new people and get to see new places and different challenges frequently. I like the challenge of "climbing the ladder" and I'm not slave, if I don't like what I see I jump ship and work for someone else.

Property may have been good to everyone for the last ten years or so, but so many people haven't seen a down turn in so long they wouldn't know how to survive one if we had one. I couldn't see how investing in property on a ful time basis would provide any sense of achievement or challenge at all.

 

Rather than focusing on the bottom line, the focus needs to be on the long term sustainability of the market and the industry that funds it.

 

Very true about the downturn comment. Especially for my generation - we don't even know what a recession is.

 

• It is capitalism at work.
• But in this instance it is more than just bottom line and long term sustainability. It is the surrender of financial sovereignty to an off-shore entity. That is why the banks and APRA are in it together. There is only so much the private sector and regulators can push back. FTAs, cheap international credit all comes at a cost. BASEL IV is the cost the entire economy will have to pay. Much that I want to believe other wise, these changes are not cyclic (property clock) but structural.
  
• As @dabbler has pointed out, it is a gradual extension of the European experiment to finance sector. To understand what is likely to happen (BASEL IV) have a look at the technical sector. The integration with regard to technical regulatory regimes is already here. AS/NZS standards are being replace by IEC standards. Expect CE labelled products to be more commonplace. Regulators are accepting foreign labs reports, testing, markings etc. Mutual Recognition Agreements (MRAs) have rendered most of the regulatory work mute. Case in point ACMA : It is legally bound to accept foreign EMC test reports and standards. APRA will gradually have more international integration (neutering) the same way as technical regulators (ACMA, ERAC, Mining, GEMS etc).
  
• Happy to hear others POVs.

 

Which lenders are/would be more likely 'tick n flick' for extending IO periods soon to end? Am with Westpac for a few and looking at this scenario later this year....and like for many, APRA requirements have put a dampener on things....

 

CBA and Westpac. ANZ also does it in certain circumstances.

ANZ did announce a policy change this week further tightening their requirements, they no longer tick n flick owner occupied IO periods, now needing a full application. Perhaps an indication of more to come?

 

Thanks Pete/Rolf...

 

I called all of this a long time back... in great detail. Many times in fact, across many posts. Was largely ignored. Was in fact told by many on here that I didn't know what I was talking about. Hate to say I told you so, but ....

I knew without a doubt that the era of credit expansion would end - anyone in banking with even a fundamental knowledge of how mortgages are funded knew the game was over, and it was simply a matter of time....

Anyone with even a fundamental understanding of servicing calculators should have know that debt reduction would be the new game to address the inevitable reductions to borrowing capacity. It is the single most valuable thing any investor can do moving forward now, if they wish to grow their portfolio footprint. In this new game, debt reduction is what will prove to be the difference between hitting a ceiling at 3 or 4 properties, or being able to potentially grow a portfolio of a dozen properties....

To their credit, many of the more recognised brokers here did understand... but many of the more "sophisticated" investors here didnt , preferring to believe that what has always worked for them would continue to work for them... One simple example being an ongoing belief that equity equates to borrowing power - a concept now proven to be completely flawed, because as many have since discovered, when you cant borrow more money, equity has no value at all...unless you sell! Yet strangely enough- still pedaled as a totally viable strategy even today, by some who purport to be "sophisticated"... very strange indeed...

It appears the proponents of the old school approaches just cant seem to understand that their successes of the previous 20-30 years were largely underpinned by a once in a generation expansionary credit environment that has now been completely disrupted , and is not going to return.

In other words, what they achieved cannot be achieved again by the next generation. And their successes are therefore not a model for new generations of investors to follow. It would not work the same way for them, or produce the same outcomes... so to follow that path would lead to disappointing results.

I recommended for the past few years that younger investors seeking to grow, or more mature investors seeking to consolidate, should add at least one NRAS cash cow into their portfolio to counter the effects of a contracted credit environment , and that recommendation stands now. More than ever in fact. Doesn't matter if its cheap and cheerful... the job of the NRAS is to get your debt down so that you can borrow money for 2 or 3 or 4 more properties. That's its only job. It is a multiplier effect decision.

Otherwise, the alternative is to keep chasing disrupted models of capital growth only , and see how much borrowing capacity that gets you when you hit the ceiling 2 or 3 purchases down the road.......

 

Ditto.....spot on!

This is what a lot of inexperienced investors have not grasped.....a lot of them have not locked in 10-15 years IO only periods and have gone with 5 year IO loans. Most would have been told by their brokers to go with less IO periods for serviceability....the real issue will turn up when people's cashflows are shot when IR go up and they can service existing loans due to the double whammy of rates increasing and paying P&I.

 

Time for that one final equity release and hold steady me thinks. My broker told me his general advice is to always calculate how many you can buy and go one less. I think I will heed his advice.

 

Well...I would focus on stress testing the portfolio work out what you could sustain with P&I and 2% more in interest rates.

So if your repayments on say $2m portfolio increased from say 90k to 140k (both IR and going to P&I) could you code. As a minimum have 1 years worth of that payment increase - i.e 50k in this instance.

One of the risk mitigation measures is to always have a certain portion of the loans fixed.

 

My portfolio can sustain 7.5 - 8% P&I and remain CF neutral, because of NRAS.

But I will be reducing debt as I go because of the massive surpluses I generate, so I will be covered both ways , and each year my portfolio will be able to sustain higher rates at P&I and remain CF neutral - I am pretty much impervious to even double digit rates.

This isn't really about being prepared for calamity though...because interest rates aren't going to move anywhere significant one way or another for years yet, perhaps even a decade or more, so the only real risk for some investors is being forced into P&I, and the other issue of course will be around being able to get past the borrowing ceilings people are now finding themselves stuck at...

You have options. You can sell , or you can hope for a windfall or a big payrise ( really unlikely for most in this very flat economy, especially those already at their peak earning capacity) and the pay rise would need to be significant enough to make a distinct difference ( which is even more unlikely for most) , or you can start reducing debt - the easiest and most practical and definitely the most profitable long term strategy as it allows you retain and expand your existing footprint rather than reducing it ...

How do you go about that though? Well, there are no short cuts - debt reduction means debt reduction. Start with attacking all non deductible debt aggressively. Attack car loans, personal loans, credit cards first. Defer that car upgrade etc... The Joneses you are trying to keep up with are living on a ponzi scheme of credit.... be smarter than the Joneses.... drive an older car and attack debt. Delay your gratification.... Once the personal loans and credit cards are done, attack the mortgage. We are enjoying the lowest rates ever...so make extra repayments. Getting rid of these things will make a truly remarkable difference to your borrowing capacity, and dramatically improve your chances of being able to make use of equity down the road, or roll over I/O terms for another 5 years, etc etc ... every move you make now will affect what you can do 5,10 years from now.

And how do you do all these things in the absence of selling, receiving a windfall or securing a huge payrise?

In my mind, when you can secure 8-10K worth of tax free money for 10 years, attached to an investment property, it's a gift that just cant be ignored. The multiplier effect that money can have is absolutely HUGE. So if you have 300-350K of borrowing capacity still up your sleeve, use it to get a cheap and cheerful NRAS , and over 10 years , provided you redeploy that 8-10K of tax free annual surpluses, you'll have cut your 30 year PPOR mortgage in half... get two of them and you'll have the 30 year PPOR mortgage paid in full within the decade. That's what will get you to the next level. That's when your borrowing capacity will go BOOM! Thats how you get way past the Joneses. Imagine your borrowing capacity with your mortgage gone. Imagine how that creates a platform to set yourself up for life ...

 

I have found that most lenders do not do more than 5 anyway, I have one that is supposed to be 10, but it is in 2 5 year periods, so something there must be an out or review after 5.

The way some of the big banks have gone lately, it would actually be cheaper to be on P&I with some for me, only reason not to change is servicing.

 

I sometimes look at these posts of buy, reno, draw down etc and think they must have stopped buying and not gone to get a loan or two lately......

OR

They have good income and very low LVR, you could still be doing it at a moderate pace in that situation.

People with large incomes, who are not just flushing the money down the loo with stupid spending will continue to be able to do many things, low income starters would be best to ignore what these people can do. I know some people earning that much that any changes make little difference to them, like the labour proposed changes would just mean they only buy new places.

 

I'm pretty luck I picked up some 10 year IOs for almost half my holdings two months ago then...

Although look, tougher lending rules will be good for young Aussies and a more egalitarian society.

If you're overlevered and suffer as a result, it's really just greed at work.

 

Great way to squash your servicability?

 

Well that's what the banker said to me. If everything is stretched to the hilt, could just blow up.

I'd rather squash serviceability for 10 year though

 

Most will do 10 yrs if pushed....I am doing this as a minimum. The Big banks are being forced to do this...thus why you should choose the financier carefully. Being on P&I is actually more expensive than one thinks...let alone opportunity costs.

Not really this what people who are not au-fait with the inner workings of finance tell you but there are many other ways around this. My work rental income is like 2.5 time income..it hit the rent reliance barrier many moons ago..and I am still going...still using 88-90% LMI loans. The income is not as relevant when you have a large enough portfolio...there are other factors banks look at. When you have a large portfolio some of them if you get to the right levels of the bank look at you as a professional investor. To access this ...you have to have consistent buying...a track record of creating equity...and a CF property portfolio by a large margin....diversified across many states...and have cash in the bank to ride out short term problems.

Just got reassessed with another lender and they are willing to put another $1.6m on the table. They are however not willing to play in certain off the plan unit markets...and are vary of certain parts of Sydney.