Loan Tip: Why Positive Geared Property still hurts Borrowing Capacity

I get many people tell me that they will be buying positive geared property, properties that pay for themselves, and they will want to buy many of them. They are shocked when I point out that being positive geared that doesn’t mean endless finance. A positive geared property will drain your serviceability like a negative geared one – perhaps slightly less.


Why is this so?

When working out serviceability lenders

a) Only take a percentage of the rent

Generally, 80% or may be just 70% of the rent is counted. This allows for some buffer plus also some costs.


b) Servicing Interest Rate

You may be borrowing at around 3%, but the lender will be assessing you with a margin on top of around 2% (or more).


c) Principal and Interest

Even if you pay interest only on a loan nearly all lenders will assess you as if you are paying principal and interest. The repayments on a PI loan are much more than on an IO loan.


d) Shortened Term if IO

If you have a 30 year loan with 5 years IO, they will assess it as a 25 year PI loan. If you have a 30 year PI loan they would assess it as a 30 year PI loan. This extra 5 years on the loan term lowers the minimum repayments on which they assess serviceability.


e) Yield Caps

Most lenders will cap the amount of rent they will take based on yield. It seems about 6% is the going rate. So if you had 10 properties on 8% yields they would reduce the rents down to 6% and work off that figure.


f) Expenses

A few years ago lenders started asking about property expenses and adding these into serviceability separately and it addition to shading the rent. You would think this could be incorporated into the fact that only 80% of the rent is taken into account, but no, now you need to list the rates, strata, insurance and sometimes other costs.


g) Being too rent Reliant?

Some lenders won’t want to use all the rental income for servicing if it is above a certain percentage of the borrower’s income. ING for example limits rent to 50% of total income (for servicing).



So in summary, just because a property is positively geared doesn’t mean you will be able to finance it and it won’t necessary improve serviceability. The more rent you get the better, but the servicing benefits tend to fade out at some point – early on.

 

Are there lenders which do not cap the rental yield ? If there are, is there some ball park numbers on the net yields which can let the borrowing power remain the same ? Say for example I got borrowing capacity of 400K left, can I borrow 300K for a property with some X yield and the lender still consider 400K left depending on higher yield X ?

 

yes, about 12% yield is needed. But there would other obstacles to overcome such as max exposure levels