Loan Servicing: Many cannot Qualify for what they have

It goes much further than just reducing PPOR debt. Reduction of PPOR debt is only the first stage. But beyond that, I will still be creating equity with or without capital growth, by reducing debt. And I will still be creating borrowing capacity with or without salary or rental increases, by reducing debt.

As you say , everything in building a portfolio is based on assumptions or expectations that may or may not come to pass, but if anything, that uncertainty is precisely why the extra income from NRAS is so valuable as a redundancy against further credit tightening, or the slower growth that is going to be the result of the regulatory intervention.

Ultimately, I have presented forum members with a legitimate, mathematically proven solution that can be helpful in addressing the issues raised in this thread ie - how to re-qualify for additional I/O periods in the years to come by improving borrowing capacity.

 

A fairly small percentage of investors have the time or inclination to be flippers or small developers... most have a full time job already. But yes, in theory that could also work - as long as you have the expertise, the seed money and aren't unlucky enough to get caught flipping in a market that changes direction...

And the other thing is - and lets get really serious here, please - as attractive as the idea is at first glance, even if you can be successful at this, how many of these types of deals do you honestly believe most punters would need to do to grow a 2,3,4 million bank balance so they could quit resi property, park the money in 7% ETF's and live off a comfortable passive income? Assuming you could achieve 250K after CGT, per deal on average? To get to $5 million, you'd need to complete 20 successful 250K deals. To get to 2.5 Million you'd need to complete 10 successful deals. How many years would that take most people, even if they had the capability and good luck along the way?

To do things on a larger scale so the outcomes can be accelerated, you'd need a fairly serious amount of seed money to get into that sort of next level development, where you might be able to turn $1Million + profits....

For most mere mortals with servicing ceilings already looming , it's just not realistic.

 

This forum isn't for mere mortals ...

I'm interested in solving problems , not in respecting barriers ... ( ask my wife ... the sign says " no entry " .... )

Another way to improve capital growth is to move from market to market , keeping your current loans but substituting security . We've recently done that , selling two in Sydney and buying one in Brisbane and another in Adelaide .

Cliff

 

@euro73 my point was more towards under current lending. I think it would be naive to think at some point in the next 5 years we won't see the reigns again significantly loosened and at that time you can revert back to a simple buy and hold.

I am talking now. If your hitting your ceiling and want to keep going then this IS your best option IMO.

I just did my first of these working full time with 0 experience and turned a monster profit. Was luck involved? I am sure there was an element of it but that was minimized by buying well. With one under my belt I could do the next in half the time.

 

Everyone starts somewhere, even the Westfields and Chadstones which came to this country with nothing.

If you made $250k on your first deal, you wouldn't be aiming to make $250k again. You'd be aiming to make $500k on the second deal. If you pulled it off, you now have $750k. So on your third deal, you'd aim to make $1.5m.

That's how most of here did it. Certainly how I did it with no seed capital. Having seed capital should only mean you start maybe at the level of the third or fourth deal, and should be making $1-2m in your first punt. If you're not, said person is wasting seed capital (presumably their parents' money, like someone I knew who was in the papers earlier who bought an apartment 6 years ago in Melb and is about to sell for a loss). It's all about how hard you make your money work for you. Why aim for a 20% IRR when you can make 50%, 100%, or 500%? None of the top end got there by making their money grow at 10-20%.

Similarly, you don't need to do developments to make $1m+ with a few hundred k equity. Of course, all off the back of lucky timing. Point though is there's always a great deal to be done somewhere. But the real differentiating factor is how hard do people really look for those deals? How many suburbs would the average investor look at in a month? 3? 5? 10?

 

I think every broker here will tell you the opposite is true, and that further tightening is coming. But I hope you're right - looser credit will just further accelerate the advantages NRAS has positioned me and my clients for... we'll have reduced debt so will have equity, borrowing power AND easier lending

 

"That's how most of here did it. Certainly how I did it with no seed capital"

May I ask... When did you do it? pre APRA or post APRA? How did you borrow more than 100% ?

Some fairly big numbers being claimed here... but like many posts promising great fortune to those brave enough to look harder - very skinny on detail.

 

IMO i think there's a bit of a misconception around credit being very tight right now. I think its quite easy in terms of overall credit conditions.

The cash rate is still at 2%, banks are lending money, and its still reasonably easy to qualify for a loan so long as you meet relatively prudent assessment buffers.

I do agree that the cash rate will never ever be 17% again. We have inflation targeting now and anchored inflation expectations. Given the cash rate is tied to inflation expectations, the lower permanent inflation rate in itself brings down the potential cash rate down much lower than in the 80s. Completely different context and barely worth comparison. Anything post 1996 is a fairer comparison.

The pre APRA lending environment was in the main a flaw by the regulators (not picked up on) that savvy investment brokers circulated around to assist clients wealth creation objectives. Current prudent lending measures definitely make more sense from a financial stability perspective and are mostly here to stay in the main.

 

Looks like people will need to agree to disagree on this?

@euro73 quick one, before you became a broker I heard somewhere that you were a BDM for NRAS sales? Why the change, different focus?

 

I know that's not true , but so far they can't be bothered joining in this particular debate .....

The Government / RBA will not sit back and do nothing if the current or any further tightening threatens to derail the property market which is an integral part of the Australian Economy .

Euro , I really think you so caught up in your particular area of interest that you don't see the bigger picture ( though you'll obviously accuse me of doing the same thing .

Classic example of " You can't see the forest for the trees " ....

Cliff

 

Well my last buy was in early 2015, although I have refinanced millions in 2016 (so I presume that's post APRA). I even had extra money pulled out. I didn't borrow more than 100%, but now we're going to be clever about interpreting "no seed capital" yea?

Not about big numbers being claimed or whatever rhetoric people want to label it as. If you start with $100k and make $250k on your first deal, you now have $350k. You wouldn't be trying to make $250k again. You'd be trying to make $500k+ this time around.

As I said, the point is there's always good deals around. Maybe it's in Townsville, have you looked there? Or it could be in Perth. How many suburbs can you name in Perth. Have you looked at Tasmania? Or did you just write it off...?

 

That may be so, but I can guarantee it will be met with future loosening as well. I am not suggesting to the heights of pre APRA but after the dust settles, things will start creeping back in. Cycles happen in everything in life and I see no exception here.
I vote for sticking this thread and watching its evolution

I do not know enough about NRAS to comment so will leave that argument to you and @tobe. You clearly have a wealth of knowledge and experience which I salute. I do however think from my limited research for the uneducated it is a minefield. A subdivision project on the other hand even for the uneducated (myself in point) can do very well and have a lot more control over their destiny. Just my 2 cents on that.

 

That's correct. I designed and was responsible for the first NRAS specific loan product and policy many years back, at FirstMac ... I worked at FM for @ 8 years. Before that I was a senior BDM at HSBC, and Aussie before that...

Why the change? Why does anyone leave PAYG and become self employed....? For starters, I work 20 feet from my bed and rarely have to put on french cuffed shirts, cufflinks, ties or suits anymore, or deal with Sydney traffic all day long , or brokers who cant add 2+2 or read a loan checklist ( PC colleagues excluded of course...but truly, you'd be amazed how below average many run of the mill brokers are ) and the guy who makes my coffee every morning knows just how I like it

 

There will be further capital raising within 12 months, and that means there will also be further tightening for investors. Expect 20-30 bpts increases. Modest, but real nonetheless...

I see the big picture better than you might believe...

 

You must have a close relationship with Wayne Byres.... cos' it's not what he's saying publicly .....

"We have an environment for housing lending that's one of relatively high housing prices, relatively high household debt, historically low interest rates and subdued income growth," he said.

"Against that kind of backdrop, it shouldn't be surprising that APRA's paying particular attention."

“A moderation in lending growth as currently envisaged should therefore not be seen as unduly restrictive: it is not placing a foot on the credit brake, but rather easing off the accelerator.”

“Our mandate is to preserve the resilience of the banking system, not to influence prices in particular regions.

“Sound lending standards – prudently estimating borrower income and expenses, and not assuming interest rates will stay low forever – are just as important (and maybe even more so) in an environment where price growth is subdued as they are in markets where prices are rising quickly.”

"By moderating growth aspirations, we are reducing the tendency for lenders to whittle away lending standards in the name of matching competitors, because inevitably, when it comes to lower standards, it's the other guy's fault.

"It's too early to say whether further action might be needed by us with a view to preserving the resilience of the banking system.

"We're open to taking additional steps if needed, but I have to say from my perspective, the best outcome will be if lenders themselves maintain a healthy dose of common sense in their lending practices and then reduce the need for APRA to do anything more."

 

Not clever... it's a fairly straightforward query... how do you borrow with zero contribution?

 

Watcha talking about Willis...just been told there is another $1.6m waiting if I need it....just need 10% deposits.

The money is there for the taking....you just have to get past the naysayers and need to present your case.

 

Why only 20-30 bps ?
Aren't the risk modelling and the equity to cover debt both up for finalization in dec 16 ?
The exact figures are not known (even lesser to me), but isn't it expected to go up from current 1.5 per 100 to 2.5-3. More so if the more stringent models pushed by APRA are adopted.
Happy to be corrected as very less information is publicly available and this is what I could get from the few academic papers and news papers.

 

APRA and the banks are well ahead of the curve on this, and the banks have already completed the majority of the capital raising necessary to cover what you are referring to above ... ie the 1.5 per $100 - to 2.5 - 3 per $100 ratio's you are referring to - although its possible they may need to do some top ups if they haven't provisioned sufficiently. But APRA seems to be happy with the level of provisioning at this stage, according to the media releases I'm reading, anyway...

What we do know is that the 2015 capital raising resulted in a significantly reduced ROE per dollar of capital for lenders, which in turn resulted in I/O increases of between 40-47bpts across most lenders in either one off's (AMP) or incrementally (pretty much everyone else) in order to restore that ROE. We all know this. We have seen this played out across the past 8 - 9 months.... everyone here has seen the rate increases...

But the additional 20-30 points in funding costs that I'm specifically referring to in my earlier post will be a result of the 2017/18 implementation of BASEL IV recommendations, whereby lenders will be required to cease using RMBS with less than 12 month rollover terms... Presently a good deal of debt raised via RMBS is funded on 90 or 180 day terms in order to attract the best pricing possible. The less time an investor has their money tied up, the lower their demands for return are. So by using shorter term funding banks keep their cost of funds down. But shorter term funding , while advantageous to funding costs for lenders, also increases the risk that otherwise perfectly robust, healthy , low arrears RMBS can become a completely delinquent basket case of horrors if there is a long credit crunch/closure in securitisation markets, which is exactly what we saw in 2008/9. after the GFC commenced .....RAMS/RHG anyone??

The Credit Crunch following the GFC demonstrated that when securitisation markets close for longer than 90 or 180 days, and banks cant refinance their debt - there can be big trouble. The bonds start to default and the house of cards can quickly unravel. So globally, BASEL has been working towards all kinds of regulatory tweaks to strengthen the global banking sector, and next cab off the rank following increased tier 1 capital provisioning ( which we are ahead of the curev on) is that banks are going to be asked to migrate minimum RMBS terms to 12 months. The aim is to reduce the risk of RMBS defaults if another credit crunch or GFC type event occurred. And in Australia's case, so that AOFM doesnt have to enter the commercial /institutional investor securitisation markets as a cornerstone investor in RMBS for multiple Australian lenders such as Firstmac, AMP, Resimac, Adelaide Bank and others, as they had to in 2009/10... committing billions in taxpayer funds into those RMBS investments.

All of this will mean that funding costs will increase, as banks are going to be asking investors to tie their money up for a longer period... best estimates are 20-30 bpts. And you can be fairly sure most of that will be paid for by investors, so that banks can continue to aggressively price to attract more P&I business, where no 10% speed limits exist. In a nutshell, investors are going to subsidise P&I lending moving forward, because P&I is the growth segment for lenders now. And its alwo why lenders are going to manipulate policies to ensure more and more I/O lenders are forced to migrate to P&I

Of course, I could be way off the mark. There appear to be other posters here who would argue that none of this is really going to happen, and who can offer a firmer grasp of the bigger picture ... perhaps they have a different perspective to offer?

 

@euro73 no doubting your knowledge and input into these forums it is always greatly appreciated.

I really have no knowledge or experience to argue otherwise, I just believe this is the hot topic, APRA is watching and the banks are standing up straight. I can't think of a single thing in life where this doesn't happen, after time the great eye stops watching and old habits slip back in.
Something happens on a work site and be sure the next month every worker has a helmet on being supervised hammering a nail. Over time that same person is shooting there mate with the nail gun. Thus the circle begins again.

And to be fair I'm a big optimist