Loan Servicing: Many cannot Qualify for what they have

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 30th Mar, 2016.

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  1. Random Username

    Random Username Well-Known Member

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    That's what they said last time, but they did and the economy did too............
     
  2. datto

    datto Well-Known Member

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    7.30 report on ABC discussed an APRA document that some analyst believes the GFC saved the banks ass.

    If it wasn't for the drop in interest rates many borrowers would have defaulted, banks would have been up the creek and economy would have been in recession.

    The fear is that it could still happen as lending has doubled since then.
     
  3. tobe

    tobe Well-Known Member

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    Let's take your nras example. Without nras the rent is $350. With nras its $280. From a lending perspective the example without nras is going to qualify for more loan until the nras client pays down their debt by $40k over the next 4 years. During that time, from a lending perspective they are at a disadvantage.

    They have less income (in the banks eyes) and they have less lenders to choose from to refinance their nras property if it increases In value.

    The tax rebate, and debt reduction is useless in the short term. It's not until year 4 or 5 it starts to compete with a non nras investment from a lending perspective.

    Let's take another example. Would you recommend clients take a 5 year fixed rate at 3% where they also had to agree to a 20% rent reduction and they could only use it to buy a specialised security that had a smaller pool of lenders to choose from with a reduced LVR?
     
  4. kierank

    kierank Well-Known Member

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    Reminds me of 1990 (or thereabouts) when I took the family for a holiday to Fiji.

    At that time, we were paying around 17% on our mortgage. We walked past a Westpac Fiji branch and they were advertising loan rates of 6%.

    Smart-ass me said to the wife "We will never see loan rates as low as 6% in Australia!"

    We are settling on our latest IP in 2 days and our rate is 3.99%, fixed for 3 years.

    I have learnt never to say never!!!!
     
  5. euro73

    euro73 Well-Known Member Business Member

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    You are really missing the point....
     
  6. Angel

    Angel Well-Known Member

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    What happened in 1970? Interest rates went up about 2% in one month.
     
  7. tobe

    tobe Well-Known Member

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    You didn't like my analogy of the 5 year fixed rates rent discount and specialised security?
     
  8. See Change

    See Change Well-Known Member

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    The point I made before ( when APRA changes came in ) was what percentage of investors are actually affected by the changes ? Around here we have a much higher level of members who will be affected but the reality is that most investors have only one property so few will be affected . The banks are being capped to a growth of 10 % in lending , but that's still a health growth rate , in particular if different places are subject to most of the growth and it's not uniform across Australia ( which it never is ...) .

    The members here and the clients of the brokers are probably not representative of the population as a whole .

    Cliff
     
  9. KayTea

    KayTea Well-Known Member

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    Don't tell me that - I'm just about to try and apply for a loan for a new PPoR….:eek:
     
  10. euro73

    euro73 Well-Known Member Business Member

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    Cliff, respectfully... until you start writing loans for a living I think you are perhaps failing to comprehend just how picky and pedantic the banks have become for most mere mortals...

    This is about far more than a 10% speed limit... that argument is grossly simplistic. 10% speed limits are not going to simply manifest as 10% continued growth year on year. The changes are far more complex and repressive than that. AS you well know, they include quite severe changes to how existing debts are assessed, severe changes to household expenditure measures ( ANZ just joined the party this week) , and in the coming months and years, challenges to renewing I/O terms.... and there are further regulatory changes to come.

    Think of it as a piece of elastic that has been reduced in length by 30-40% .... it will just not stretch much further for many people. Sure, new entrants /participants in the residential markets with unused capacity will have some elasticity left, but their elasticity will peak far earlier than it would have last year, or at any time in that past 20 years really.... as will the elasticity of all future generations of buyers entering the market that follow them... This will have a compound effect. To ignore that reality is foolhardy. Every future generation of purchasers will be able to borrow less money and purchase fewer properties, than your generation or my generation ( ie the posters here with large portfolios ) were able to...

    You are already hearing repeatedly from brokers and borrowers all over these forums that they are encountering issues with servicing ceilings, just 8 or 9 months after the changes have been introduced... how many more do you think will be hitting issues next year, or the year after, or the year after? The number of ceilings being reached is only going to grow and grow. You , yourself have posted recently that you have also reached servicing ceilings....

    And outside of these forums, I have long standing relationships with literally dozens and dozens of brokers across the country, many of whom are increasingly calling me asking for advice on how to get deals to service.... I received a call just last night from a Loan Market broker who writes $40 -50 million per year who told me she has been encountering unbelievable difficulties for the past few months in getting deals to service...

    So it's not isolated to these forums. It is slowly but surely spreading to capture a large percentage of borrowers. Your suppositions that these borrowing ceilings are limited to the few, are just wrong. All data from all aggregators is telling us that for months, investor lending is falling in volume. And when I start getting calls from brokers who dont specialise in the investor space, telling me that deal after deal is getting harder, and can I help them restructure things for clients because it's beyond their level of expertise, that tells me the problem is spreading...

    This post was about how to get past borrowing capacity limitations either already reached or soon to be reached, so that existing I/O debts, when reassessed at the end of 5 or 10 year I/O terms, can be renewed for a further 5 or 10 years I/O, or so that additional borrowing can be secured...

    I understand you dont like NRAS. I understand you dont see any value in it. Fair enough - but you've already enjoyed the advantages of a massive 20+ year credit boom and built your portfolio... for those starting out however , they will not be able to replicate what you have done...

    So I would ask you this.... what do you propose those people reaching ceilings and needing to renew I/O terms, should do? What do you propose those with lots of equity but who cant access it, should do?
     
    Last edited: 5th Apr, 2016
  11. Jason Tyrrell

    Jason Tyrrell Well-Known Member

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    I assume the comment about the late 80's was comparing difficulty in accessing credit, not rates as such.
    Business investment was booming in late 80's and rising inflation was the reason rates were pushed up. Annual inflation in the late 80's was about 8%.

    Completely different now. Business investment has weakened since the peak of the mining boom and housing investment has been the driver of the domestic economy. But construction will soon peak in this segment, with the next mining upturn years away. So talk of rates soaring is rubbish.

    Inflation is 1.7% or thereabouts. Retail sales recently released for Feb were flat.
    Markets are pricing the next rate move are more likely to be down, rather than up.

    Yes, lenders won't pass on in full, if at all. But that is not the point.

    Completely opposite conditions of the late 80's.
     
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  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    NRAS rents cant be looked at in isolation without also looking at :
    1. The state govt contribution
    2. The effectof Non-assessable non exempt income on reducing deductions and
    3. The Commonwealth refundable tax offset

    Rough back of envelope stuff this can reflect 20% + extra income to offset the lower rent up front.
     
  13. euro73

    euro73 Well-Known Member Business Member

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    Your analogy was fine Tobe... just flawed.
    I would agree with you if lending was unrestricted- but its not.
    You seem to still be in the in equity = borrowing capacity camp, which surprises me.... it ignores the reality of the new lending world.
    And there are at least 15+ lenders happy to lend against NRAS. I'm happy to take you through them if you aren't across the names ... :)


    But ideology aside- you still haven't been able to explain how a CF neutral property, which in lender terms would be massively CF negative when the debt will be assessed at 7.5 - 8% assessment rates, does anything at all to improve capacity. As I have noted previously, you need 10% + yields to break even on a servicing calc today ( Pepper and Liberty aside)

    More concerning to me is that you don't appear to be grasping that 40-45K of income for servicing has essentially been removed from most lenders calculators per $1million in existing debt. I hope those clients of yours with $1 Million or more in debt are not being advised that CF neutral and modest rental increases are the keys to breaking the servicing ceiling when they reach it? If so, they are going to be waiting a looooooooooong time before they can re-leverage.... perhaps a decade or more.... and for those with $2 Million or more.... woah!

    Short term 4-5 year thinking isn't what I'm interested in... and its not what my clients are interested in... Talk to me in 10 years when my clients have paid down their PPOR debt in full, have removed all of that non deductible debt from their balance sheet, have their NRAS properties reverting to FULL market rent and have not only the equity but also the borrowing capacity to purchase 5 or 6 more properties .... Then we can compare who wins the end game :)
     
    Last edited: 5th Apr, 2016
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  14. tobe

    tobe Well-Known Member

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    I'm not suggesting 10% yields. I'm suggesting your example, without nras. I'm not focussed on growth.

    I would be interested to learn which lenders use the tax rebate for income in their calculators. I only know one, and that's only for lending below 80%.

    I think it's great all of your clients aren't concerned that their borrowing capacity will be adversely impacted for 5 years. However it doesn't suit all clients. Some clients might want the flexibility to refinance and use the full rental income for servicing before the 5 year mark. Some clients might want to take their lending above 80%

    .
    All the best with NRAS. Please let me know if you ever get a client who seems to understand the concept but still isn't that keen.
     
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  15. See Change

    See Change Well-Known Member

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    Time will tell . Will be interesting to see if Brisbane / Adelaide / Hobart still boom over the next few years or whether the changes impact that .

    Cliff
     
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  16. euro73

    euro73 Well-Known Member Business Member

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    My clients know that they are going to end up able to access far more money in the long term... and grow a much larger portfolio in the long term, and not have to sell to free up the borrowing capacity to do so...thereby also developing a larger potential passive income in the long term...

    They don't intend refinancing their NRAS properties to draw on equity during the first 10 years. This is part of the strategy. They intend to draw on the equity created on the loan facility where all the surpluses are redeployed, instead. ie replace non deductible debt with deductible debt.

    This isnt pie in the sky stuff. I've already done this myself... ie - paid down a 440K PPOR in less than 2 years using the surpluses from NRAS, then drawn that equity down to purchase additional properties.. Several of my clients - including many dozens from these forums, are doing the same, albeit with fewer properties, so at a slower pace, but many have nevertheless already seen 60,70,80K come off their PPOR non deductible mortgages last year and the year before, and will see it again this year, next year, etc etc....

    By your argument though, they and I haven't enhanced our capacity to borrow, but rather "disabled" it... Supposedly we would have been better off with CF neutral properties which wont really aid the reduction of non deductible debt in any meaningful way at all.

    So let's run with that for a moment and say that was the case - ie I hadn't paid down the 440K of non deductible debt but had instead purchased non NRAS properties and received $10-20 per week rental increases over the past 2-3 years. Those increases would equate to $500-1000 per year per property, of which a lender will use 70% or 80% ie 350-800 - at best. I'd needf 10 of those to generate the debt reduction 1 x $8000 NRAS surplus generates. So all things being equal, I'd have barely made a dent in the non deductible debt of 440K , which is now typically being assessed as costing me $3077 at 7.5% P&I , or $3229 at 8% P&I, when I next try to borrow. By any definition, that would be a far greater disability on my capacity to borrow than 12.6% less rental income for servicing purposes.

    But instead, my position is that I no longer owe that 440K. Instead, I can access that equity in my PPOR for deposits and stamps and borrow for INV purposes, add additional rental incomes to my income for servicing from the new investment purchases, and add neg gearing to my income for servicing from the new investment purchases, all with 440K less non deductible debt weighing down my borrowing capacity.

    The debt reduction created , far outweighs the 12.6% reduced rental income ( after applying gearing addbacks) . Its that simple.... Sure it may take 4 or 5 years to do so, but I'm interested in my clients being able to negotiate the long term, and get beyond the conventional ceilings they will otherwise be constrained by if they utilise only conventional properties with conventional cash flows. If that means that for 4 or 5 years they cant quite borrow as much, but in the end they can borrow far more and grow a far larger portfolio, that's still an outcome they prefer....

    It doesn't have to be for you. That's perfectly fine. But to argue it creates a borrowing disability in the end game, is not right. It's really about taking one step backwards to take 5 steps forwards.... and in the end it will improve borrowing capacity significantly
     
    Last edited: 5th Apr, 2016
  17. euro73

    euro73 Well-Known Member Business Member

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    At their lower price points I expect all three to have a pretty good 2016 .... Brisbane and Hobart in particular are already showing that, but Adelaide is still the laggard - always seems to be for some reason....

    I have said in many previous posts that Brisbane in particular should enjoy a pretty good 12 -18 months as post APRA smaller budgets look for a home there, but the same ceilings will come into play in those markets in time as well... and buyers need to make sure they get at least 3 or 4KM out of the inner city / West End oversupply . It will just take longer to reach those ceilings as debt sizes there arent as high as Sydney and parts of Melbourne.... but the ceilings will be reached.

    I also think Perth, while down at the moment, makes for some good buying - but only where there is NRAS to buy the investor 10 years for the market to rejuvenate itself... and where they can use that 10 years to aggressively reduce debt.
     
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  18. See Change

    See Change Well-Known Member

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    Ah .....

    Maybe we're talking at cross purposes . My view point has been that the APRA changes acted as a circuit breaker on Sydney , which was getting close to its peak anyway .

    I still expect that Brisbane to boom and probably reach similar levels to what it would have reached anyway . It might take slightly longer to get there .

    There is alays ceilings that are reached which limit how far a boom goes and in my experience what specific factors come in to play tend to vary each time , but the out come is pretty similar each time .

    Cliff
     
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  19. tobe

    tobe Well-Known Member

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    It is a step backwards initially. It doesn't suit everyone. It may be a step forwards in the future, but that is based on assumptions or expectations that may or may not come to pass. The number of steps forward will depend on factors outside of our control, like the credit environment, or the state of the economy.
    Kudos to you for buying them yourself and reducing your own PPOR debt.
     
  20. albanga

    albanga Well-Known Member

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    If servicing is tight, investors simply need to become active as opposed to passive. Instead of a traditional buy and hold, they need to look towards manufactured growth via opportunities such a renos, subdivisions and development.

    The profits are simply reinvested back into the next with the surplus reducing bad debt. Servicing shouldn't be an issue as your only ever holding that property (and a PPOR perhaps).

    I appreciate this is not for everyone but it solves a lot of these problems.
     
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