Loan Servicing: Many cannot Qualify for what they have

I had a interesting conversation with a friend who works @ a top 4 bank. His or Hers role @ the bank is to look at policies, risk and any compliance issues within the home loan sector for both owner occupied and investment loans.

If you think getting a loan is tough now just watch what will happen in 2018... from what I have been told the number of contingencies the banks are going to introduce it is going to make borrowing allot harder.

 

2.5m all done with 5 years IO, equity release all done.

Serviceability is not an issue, but we've decided to save up and take a wait and see approach.

I trust the smart people here who's advocating the end of cheap credit, upcoming tightening and potential IR increases due to increase funding costs etc.

Good time to finish reading all the books and learn a bit more about industrials vs resources

 

Can you please elaborate a bit more on the specifics? Sounds very useful.

 

How is NRAS going to help exactly? Most lenders don't use the tax rebate in servicing, and most also have restrictions on the LVR for NRAS properties. Many are also moving towards not using negative gearing, so someone with NRAS is going to be in a poorer position for new lending due to the 20% lower rental income.
Add the fact that many NRAS properties are sold with a premium price due to the developers and sales agents marketing the 'free' government money means its a pretty poor choice, especially in the early stages of an investors lifecycle.

Sure after 10 years, if the applicants have been diligent in repaying their loan with the government rebates, they may be in a position to leverage again, but after 10 years a cash flow neutral 'growth' property in a regional city could have a similar result, with a substantially higher chance that it could be used to leverage further in the meantime.

I don't have the answer for the current credit environment. I'm leaning towards building buffers and moving carefully. Part of that is repaying debt, but its also investing in quality assets, perhaps outside of property, and also maximizing borrowings now for a sleep at night fund into the unknown.

 

There are also many other ways to earn tax free money besides NRAS. For example, if you play the tuba in the army reserves band thats $6k pa tax free, and without the hassle of tenants!

 

Me too - aggressively saving into offset to lower LVR, increasing LOC limits where possible, looking to invest further in shares/ETF's and spending time doing the research on the next property deal with no rush at all to jump in. But I'll sure be ready when the time comes.

 

Hello, Would love to but not allowed disclose any further information... but have been advised that credit will be tight as per late 80's and early 90's

 

For the less informed, including myself, what was credit like in those years of 80s and 90s

 

I'm curious about this too.

 

I'll address your arguments one at a time Tobe.

Yes- The 20% less rent received under NRAS will initially reduce capacity by a very minor amount , but the surpluses reinvested in debt reduction will replace that lost capacity quite quickly, and add significantly to income through debt reduction. Within 4 years in fact.

Take a quick and dirty comparison for example - you buy a $350 per week NRAS property where 20% less rent is received. That equates to a reduction of $70 per week, or $3640 per annum. That in turn equates to $2293.20 after 37% MTR neg gearing is applied by the lender calc. The net impact of that on a lender servicing calculator? @23K reduced capacity if we work on @10x multiples...

Compare that to the net impact of paying 32-40K off your debt across the next 4 years. (4 x 8-10K surpluses generated by NRAS) At assessment rates of 7.4%, that equates to $2368 - $2960 , more than replacing the $2293.20 reduced rental income noted above.

So within @ 4 years your lost capacity from $70 per week less rent is compensated for by the 32-40K reduced debt assessed at 7.4% I/O. It would be an even shorter time frame if the debt was assessed at P&I.

But there are further compounding benefits, because each year beyond the 4th year sees you at a further advantage, allowing you to improve borrowing capacity faster, and eventually as you replace that repaid non deductible debt with new deductible debt, 7,8,10 years down the road, you add extra income from rent, extra capacity from neg gearing etc... further compounding the differences .



As for the argument that most NRAS is heavily overpriced. I've sold over 350 NRAS properties - and no val issues. You are looking in the wrong places.



As for the argument "Sure after 10 years, if the applicants have been diligent in repaying their loan with the government rebates, they may be in a position to leverage again, but after 10 years a cash flow neutral 'growth' property in a regional city could have a similar result, with a substantially higher chance that it could be used to leverage further in the meantime"

I dont understand this argument at all. Are you claiming that a CF neutral property could have similar impact on borrowing capacity as an 8-10K CF+ property? How does that work? How does a CF Neutral property become a superior debt reduction vehicle to an NRAS property over 10+ years, which produces 8-10K in tax free dollars? Maybe I failed maths 101, but CF neutral doesn't add up to 8-10K tax free CF+ in any maths, in any language.


I see many posts here on APRA and ASIC and servicing ceilings. Many people asking- how can I get past these ceilings? How can I grow my portfolio when I cant get access to much more money? Well, I am showing you a mathematically proven solution.

What I am saying is that NRAS is a very very powerful and helpful tool to grow a portfolio, especially for those starting out or those reaching servicing ceilings. I believe anyone with the capacity to fund a 350-400K should add an NRAS property to their portfolio. Not as a growth vehicle, but as a vehicle for getting into 3 ,4 or 5 more properties over the next decade....

Old methodologies such as those you are suggesting, are redundant now.

 

touche....

 

It's not without its hassles...

 

Most lenders wont use the tax rebate as income in their calculators, that's why a cf neutral property will be better to increase borrowing capacity .

4 years later, if the example put their tax rebate into paying down the debt they will have made up the lost 20% rental in a lenders servicing calculator.
If they had also avoided overpaying for the property in the first place and they used a lender who is happy with NRAS security and the banks valuer agreed the security had also grown in value they might be able to refinance and use the equity for further growth.
If they had bought a cf neutral property they would be in a similar borrowing position, all the way through not having to wait until the 4th year (depending on capital growth and rental increases).

I'm not saying NRAS cant be a good investment, but its not for everyone, and people getting into NRAS as their first or second property are going to be disadvantaged in the lenders eyes for 4 years until the rental reductions keep pace with the tax deductions. Its not going to pay off their PPOR, Its not even going to pay off the investment loan. Its not going to increase borrowing capacity until at least the 4th year.
I can see it would work for those at the end of their borrowing capacity, or perhaps in Super, but locking in a 20% rent borrowing 'disability' in exchange for $10ky in income banks cant use isn't a way to increase your borrowing power, or get into more investments.

 

"a cf neutral property will be better to increase borrowing capacity"

CF neutral wont produce any additional income with which to reduce debt. In fact, you'd need to be generating 10% + yields from a non NRAS property just to be treated as neutral for borrowing capacity purposes, by most lenders, who would accept 80% of the 10% as income for servicing. ie 8%. So 8% income against 8% assessment rates would get you precisely no net impact on borrowing capacity, one way or another. So the argument is flawed unless you are only interested in helping to get your clients to their minimum potential. But if you are interested in getting your clients solutions that will get them past the APRA ceilings and helping them achieve more than their minimum potential and getting ahead of the curve in the post APRA world, a vanilla CF neutral property , one not producing 10% + yields, will most certainly be absolutely useless in improving their income for servicing, and most certainly inferior to NRAS, which would within 4 years produce clear mathematical gains to borrowing capacity.

But If you do want to take a non NRAS path - regional dual occupancy properties would be the next best solution... but not single dwellings, unless they are yielding well over 10% .


"If they had bought a cf neutral property they would be in a similar borrowing position, all the way through not having to wait until the 4th year (depending on capital growth and rental increases)"


How? Please provide an example. Yes they would be in a superior borrowing position initially... but only initially. But the maths are the maths... My client reduces far more debt than your client over the next decade, so their ceiling can be expanded far more quickly than your clients ceiling - setting aside large pay rises or windfalls of course... . Meaning my client ends up way ahead of your client in the end game. See I'm not interested in who wins the borrowing capacity battle in the first 4 years. I'm interested in who wins the end game.


"locking in a 20% rent borrowing 'disability' in exchange for $10ky in income banks cant use isn't a way to increase your borrowing power, or get into more investments"

I'm not sure what it is about the benefits of debt reduction you don't get, but 8-10K tax free dollars per annum reinvested into debt reduction far outweighs a short term 20% "disability" , which is really a 12.6% disability on a lender calc that accepts neg gearing at 37%. It doesnt matter that lenders dont accept it for servicing - the pay off comes later, when the debt disappears and my clients ceiling expands and your clients ceiling doesnt.

I think anyone starting out today, or already started and with a modest portfolio, and who does not enjoy a very high income so will not have the room to get beyond a modest sized portfolio, is absolutely nuts not to place one or two of these cash cows into their portfolio - if for no other reason than the compounding debt reduction multiplier effects it will bring to the portfolio.

Portfolio building is no longer just about growth. In the post APRA environment it is just as much ( if not moreso) about cash flow management - because what good is $1 million equity if you cant borrow against it, and the only way to access it is to sell?

This comes back to borrowing capacity. The thread relates to re- qualifying for new I/O terms for debt already in place..... and I think - actually I know- large amounts of debt reduction will prove extremely useful towards that end. So while I would love to be confident that APRA and ASIC will lift their intervention, it isnt looking likely... and while the concept of rent rises is lovely, it wont make a material different unless its an exceptional rent increase... and parking money in offsets will make zero difference to capacity as the entire debt will still be assessed...... We all have to be realistic about how we can manufacture additional income for servicing... and help clients to do so.... and in the absence of very large pay rises , rental increases or windfalls , debt reduction is the only feasible strategy... and I dont know of any other resi property ( other than regional dual occ - maybe ) that can consistently produce 8-10K after tax, towards that end....

Or learn to play the bugle

 

Graph half way down this page - HISTORICAL INTEREST RATES AUSTRALIA tells me that it went up to 17% during this period. That would be a number of 0.25% increases!

 

We wont even make it half way to 17% in the next decade...

 

Yep, went up 2% from June to July 1974 as one example.
Eased off once we "had the recession we had to have" too late for some unfortunately.

 

euro is right, no chance of seeing those kind of rates in any forseable timeframe.

Simply because if rates went up to 9%, the economy would grind to a halt. The country simply can't afford interest rates in the double digits. Debt levels are too high to make high interest rates affordable.

 

9% interest. Good time to have cash and earn interest.

 

Never say never Datto,there was a post in the old site about rates many years ago,when the numbers were between 7-8%,and some that were posting around that time pulled back to anonymity very quickly..