Net yield 7.25%

Hi all,


Considering the assessment rate these days is 7.25% P&I, would an IP that is say 250,000 owing and returning a net yield of 7.25% basically be discounted from current debt when assessing for new debt? Or even 7.25% net after the 80% handicap of rent, would it work in that instance?

Say your borrowing capacity is 500000k, can you purchase a PPOR for 500k if your IP is perfectly neutral, or does it not really work that way?

Cheers,
Arc

 

The IP would need to be more than 7.25% net yield because debt is assessed at P&I.

Also the handicap of rent needs to be accounted for.

I think to completely restore borrowing capacity the IP really would need to be yielding something like 11-12% in net yield

 

7.25% is exactly 80% of 9.0625, would this yield do the trick then?

 

NO - because they only accept 80% of rent received too. And then most lenders either have a cap of the maximum rental yield they will accept on property or other exclusions because in reality it's very unlikely you will find a quality property with a 11%+ yield. The only times we were seeing this in recent history was mining towns which lenders quickly put restrictions on after the prices/rents fell through.

Lenders which put yield caps for calculations are around 6-8% gross.

 

Thanks for the heads up, was just running through the scenario for argument sake

 

You need about 11% to have minimal effect depending on other factors too though.

Speak with your broker so you know what each buy will do approx.

 

The yield cap if 8pc gross the lenders place would be specific to residential only ?

 

Oh I definitely would, I don't have any IP's approaching that yield, but was just running through the numbers mathematically to try to find out which point (yield) an IP would not count towards your borrowing capacity because the rent coming in would neutralize the liability.

Though it seems that banks don't see it that way, still, would be curious using the banking algorithms (which I'm not privy to) to find 'that' theoretical yield though.

Regards,
Arc

 

I worked it out at around 11 to 12% before - but that was a few years ago when IO = PI now it can be much worse.

 

Thanks Terry.
Aren't all liabilities calculated at 7.25% PI? So the variance in IO and PI interest rates shouldn't really make a difference?

 

A better way to think about it instead of yield, is x amount after all outgoings including full loan on P&I at 7.5%

If your place is positive after full costs, actual costs, plus a margin (i.e earning money from your investment which is what it should be), it will have less impact.

Biggest factors are personal debt and income from job/business, so you combine all three things to do best you can if you want to keep growing, also a sale here and there cannot hurt if you want to grow.

Buying CF negative places is the quickest way to build a wall if you keep other things the same.

There will always be a way to make things happen, if the deal is worth it, it is the cost of funds that will knock vanilla buys on the head.

 

Not at all banks. Same banks still take actual repayments for other financial institution loans. and the assessment rate won't be 7.25% at most lenders.