Maximum Borrowing Capacity

Hi all,
New member to Property Chat! Loving it so far.

I was just wondering if there was a way to work out my TOTAL maximum borrowing capacity? I am currently in my 1st year of real estate so my income structure is base + commission, but the base is quite low because of the commission structure.

I understand how to work out my borrowing capacity from one bank, but is there a way to work out my TOTAL borrowing capacity (assuming I go to a different bank for a new loan for every new acquisition)?

Let's assume, for arguments sake, the 1st IP is a perfectly neutrally geared asset, so it has no bearing on my income or expenditure position.

Kind regards,
Paul

 

@Paul D

In the current lending environment the best advice I can give is speak to a few different Brokers so they can work with you to see what is possible...

 

Hi @Paul D welcome to the forum!

With a commission based salary that's only been in place for less than one financial year, it's going to be difficult to take advantage of your full income for borrowing purposes. Lenders don't take any of your income at face value and the challenge with commissions/bonus/overtime is they want to see hard evidence of consistency over an extended period of time.

Ignore the borrowing calculators on the banks websites, they're useless for two reasons. (a) They don't actually reflect the banks actual lending policies and (b) even if they are accurate, it's unlikely you'll enter accurate information that reflects the banks policies. These calculators are a marketing tool, designed to get you to get in touch and commit to them.

Furthermore, neutrally geared by your (or the ATO's) definition is not the same as the banks definition. Lenders are far more conservative. You need a rental yield of at about 10%-15% for a property to improve your borrowing capacity. Anything else only reduces it. Given that rental yields in Melbourne are around 2% - 4% at the moment...

If you want to have a better understanding of what your borrowing capacity really is and what you need to do is contact myself or one of the other brokers on this forum, make an appointment and work through it with us.

 

Thanks @Peter_Tersteeg - very insightful response.

Let's just say 'Bank A' assigned me a maximum borrowing capacity of $350,000 and I put down a 10% deposit with LMI and purchased 'Property A' which was positively geared, but I use the full $350,000.

Then, let's say in 12 months time, I save up enough money again for a 2nd deposit and go to 'Bank B'. At this point, let's assume that my income and expenditure is exactly the same from when I bought my first property. Will 'Bank B' then give me a similar maximum borrowing capacity to 'Bank A'. If I have a 10% deposit + LMI, will Bank B then be able to lend me something close to $350,000 for a second purchase?

 

Edit - just read the question properly. If bank a has a max of $350k and you use it all on property 1, it’s unlikely you’ll be able to borrow for another $350k with any lender except perhaps one or 2, assuming property one is structured correctly.
.....
However assuming you earn enough to qualify for the loan, and all else is equal it’s likely that you’ll be able to borrow less than the first time as your current debt does not get assessed at its actual cost and the rent does not get included at 100% either.

Each property will reduce your borrowing capacity to the point where you simply can’t buy more, regardless of whether it’s positive cashflow or negative. In theory, if the cashflow was huge you could keep going but in reality lenders get uncomfortable with super high yields and will limit it to 6%.

It would be worth forming a good relationship with a broker so you can get a bit of a handle on how property finance works - it would be useful in your line of work.

 

Yep I assumed that would be the case. I was just worried that a ‘maximum borrowing capacity’ applied as a blanket rule across any mending facility. That is, if ‘Bank A’ assessed me with a maximum borrowing capacity of $300K and I used it all, that regardless of any bank I went to in the future with the requisite deposit, that that maximum amount would apply as a fixed amount

 

most lenders will lend more or less similar and once you have spent that with one lender, you’re done across the board.

There are ways to extend this though with structuring but needs careful consideration and longer term planning as it’s quite high risk. It can be useful in some situations though, especially where incomes will increase dramatically in the near future.

 

First day on property chat and already very helpful responses! Thank you!

 

There really isn't a simple assumption or rule you can make in borrowing capacity. Most lenders have very similar basic criteria to determining borrowing capacity, but those criteria are governed by lenders policies, which do vary slightly. In this, there's a little room to wriggle and by being selective about how lenders are used can give you a little extra.

Many look at this as a simple lowest to highest scenario but that's a rookie strategy and will create problems later on.

By choosing the lender that will give you the least money first, you'll later be unable to do things like access equity for deposits later on when you really need it (refinancing may be available, but possibly not).

If you choose a generous lender early on, then depending on the lender, they might not be so generous later. The difference that makes a lender generous or not can depend on what you've done previously.

This is where lending strategy comes into it. What are your resources, what are they projected to be moving forward, how do you best utlise those resources for the best medium and longer term outcome? There's no single solution here and the goals move with each purchase as buying a property has it's own set of financial parameters. Hence an individual approach is required.

 

This is possible BUT lenders policies are always changing so you may map out a plan now that is obsolete in six months. Relying on commission income there will be a couple of lenders that will stand out to start off with, but after that you will be back in the Peper/Liberty boat with everyone else.

 

Nope :-(

Aggregators provide brokers with software that can run simple max borrowing calcs for vanilla scenarios (PAYG incomes purchasing one property) but for investors and/or those reliant on comms/bonus/allowance income, etc it's not as straight forward.

In these scenarios - you look at how long/consistent the comms have been paid. From there -the broker will be able to narrow down the lenders that will fit your situation. Once that's established - most decent brokers will know which of those lenders produce the most generous borrowing capacity calc for investors.

Cheers

Jamie

 

Where will you be in 12 months if the slowdown in sales bites and prices reduce as well? Going from 1-2 sales/month to 1 per 2-3 months - commission soon dries up.

 

@Rolf Latham

I am still in my final semester of university and I am working full time at the same time. I would say I will be working for myself (whether in sales or another capacity) in the next 5 years.

Aside from that - I just listened to a podcast with Michael Xia and got in touch with him, and we just got off a 30 minute phone conversation. He has said marvellous things about your advice. Because of that - I have another question:

If you were in my position earning a $50K base + commission ($85K in savings) and you were making your 1st investment in Queensland, would you prefer to buy a property with granny flat upside, build the granny flat and have a good positive cash flow to increase your serviceability

OR

Despite the fact that my base is only $50K, would you use the $85K in savings to buy as many properties as you could that are going to allow you to manufacture equity to buy again?

 

If you require a 10-15% yield to increase your borrowing capacity, how do people "keep going" and continue to buy property after property? Wouldn't their borrowing capacity be capped after 2-3 properties?

 

Yes, these days most people are capped at 2-3 properties.

If you're wondering how people build large portfolios, there's a few things:

* They did it at a time when servicing criteria were much more generous and rental yields in the existing portfolio were better.

* They didn't do it all at once. Most people with larger portfolios take decades to build them. During this time their salaries and the rental income increases, and they reduce debt.

I'm often presented with the statement that people would like to retire in 5-10 years. It's no impossible, but it's extremely unlikely. What you can do reliably is retire in 20-30 years very comfortably.

 

What makes you sure people do "keep going"?

Once you hit the limits you have to aggressively pay down debt - so you can borrow more. There are a few little tricks to implement, but at some point a limit will be reached.

 

A lot of people do have their borrowing capacity capped after 2-3 properties.

 

How do these people do it?
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4 properties in 6 months - How Roy and Rowena went from making costly investment mistakes to owning 4 properties in just 6 months