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Refinancing - equity access to service cash-flow shortfall...

Discussion in 'Property Finance' started by bestor Investor92, 15th Jan, 2016.

  1. bestor Investor92

    bestor Investor92 Member

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    Hi Team,

    understand there are many valid reasons to a bank why someone would want to refinance their investment loan/s through performing valuation & getting access to equity, ie - buying another IP, renovations, changing loan packages, rates etc.

    I am wondering about some approaches to refinancing when goal is: equity access to support servicing your negative cash-flow shortfall/ servicing existing portfolio debt/ investment expenses.

    In my head, changing banks and refinancing your loan is the most plausible as the lender would perform valuation, provide loan amount and LOC as long as you pass borrowing power and serviceability by that bank.However, constantly changing banks....not ideal.

    Thoughts?

    Thanks all!!
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hiya

    Are you wanting to borrow to service existing debt?

    If so - they won't like the idea.

    Cheers

    Jamie
     
  3. York

    York Finance Broker Business Member

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    So you want to get a loan to service other loans? Then how will you service the second loan?
     
  4. Redom

    Redom Mortgage Broker Business Member

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    Heya,

    Not quite certain if i read it right, but if your talking about releasing equity to use as a buffer - most definitely, its a great risk management strategy that i've been jumping up and down on these forums on recommending people do through 2015. Taking equity out and having it in your control is pretty important and doing it when its available to you is generally a good idea (not going to the bank when you need it most, as you may not qualify then).

    In terms of how to do it, you definitely don't want to tell the bank that its to fund cash flow deficiencies - best to do an equity release and say things like 'future investment use'. This will fly with plenty of lenders at 80% and some above 80 (ANZ are OK).

    You'll need to demonstrate serviceability though - which is getting harder and harder relative to mid 2015.

    Cheers,
    Redom
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. euro73

    euro73 Well-Known Member Business Member

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    Having a cash flow buffer is mandatory in my view. I strongly recommend a buffer to all my clients so that in the event of an incapacity, illness or injury which prevents them from earning a salary, a contingency is in place that buys them time to get back on their feet or time to sell without getting into mortgage arrears, should that be necessary.

    Calculate the difference between all of your expenses ( interest, council rates, water, insurance, property management , strata etc) and the anticipated rental income for a year and that should be a pretty good estimate of the sort of buffer required for a 10-12 month contingency. At rates of 4.5 - 5% Interest Only, 6-7K buffer per property should about cover it.

    For my clients, who have NRAS in their portfolio's, this buffer needs to be closer to 9 -10K because of the 20% reduced rental income received. It is then fully replenished annually by the negative gearing refunds received and the NRAS credits received, and they are also generally left with an additional 8-11K tax free CF+ after replenishing the buffer. This simply repeats for the other 9 years... meaning the cash buffer is established once only, replenished annually and the model is then self funded and essentially bullet proof for a decade.

    Quick example.

    Borrow 425K to buy a 400K NRAS property. 400K + stamp duty + 10K buffer.
    4.5% I/O = repayments of $19,125 annually. Add @ 5.5 - 6K for all additional non interest expenses... council rates, water, insurance, property management , strata, NRAS compliance fee. Total running costs for 1 year = @ 25K
    At 5% I/O , total costs would be @ 26.5-27K

    If market rent is normally $400 per week, NRAS rent will be 320 per week, or @ 16.6K per annum.

    Pre tax loss is therefore somewhere in the vicinity of 9-10K.

    Add 9-10K or depreciation, and you should reasonably expect an 18-20K deductible loss, which will provide for the following ATO refunds

    34.5% MTR = @ 6900 + 10,917 NRAS. Total after tax = 17,817. Set aside 9-10K to replenish the cash buffer and invest the remaining $$$ towards PPOR debt reduction
    39% MTR = @ 7800 + 10,917. Total after tax = 18,717. Set aside 9-10K to replenish the cash buffer and invest the remaining $$$ towards PPOR debt reduction
    49% MTR = @ 9800 + 10,917. Total after tax = 20,717. Set aside 9-10K to replenish the cash buffer and invest the remaining $$$ towards PPOR debt reduction

    But even where NRAS is not involved, maintaining a buffer is just smart investing.
     
    Last edited: 15th Jan, 2016
  7. Greyghost

    Greyghost Well-Known Member

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    A
    always with the NRAS....
     
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  8. euro73

    euro73 Well-Known Member Business Member

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    For very specific reasons. It is an accelerant. The debt reduction it facilitates, and the resulting equity creation and borrowing capacity creation, is a very real and very effective solution to servicing constraints being felt by many.

    Got a better solution that delivers improved capacity and superior cash flow management to deal with the new world of post APRA regulations? Perhaps everyone should just get better, higher paying jobs? Perhaps everyone should just hope for APRA to change their mind?

    If you read the many posts I have written about NRAS over the years, you'll realise that I have always argued NRAS should form part (not all) of a portfolio, for those very specific reasons.

    Just as you wouldn't build a share portfolio without including some defensive, high yielding stocks, it's time to start treating property the same. Particularly for those starting out who have started reaching servicing ceilings already, and haven't (and likely wont) benefited from the credit boom previous investors benefited from.

    It's been 6 months now since the changes and it's time everyone faced facts- the easy and expansionary credit environment that allowed a speculative approach to property for the past 30 years is ended, and setting aside those with mature portfolio's that have already matured to CF+ status without the need for NRAS, how else do you propose newer investors will grow their portfolio's when wages are flat, rates are at historic lows , yields are below 5% in most markets and regulatory changes have just taken anywhere from 20-40% capacity away? I'm all ears.... but you'll find there simply arent any easy solutions short of big pay rises or some other form of windfall.

    In the absence of lucking out that way, NRAS and its associated tax free surplus cash flow provides for an excellent medium term solution to two problems that are very real concerns for the first time in 30 years - debt reduction and borrowing capacity improvement - especially when you dont view an NRAS approved property in isolation, but rather as part of a broader strategy across a portfolio.

    This fascination about growth without respect for cash flow management is not going to work anymore for most investors in this lending environment. Not all, but certainly most. 6 months of posts on these forums have made that more than clear. All the equity in the world has now been clearly, unambiguously demonstrated to be utterly useless in helping you borrow more money. Only those with significant income can continue to take that approach while ignoring debt reduction. Everyone else needs to build a portfolio with at least some attention to managing their borrowing capacity, which means the inclusion of some cash cows, because without debt reduction /borrowing capacity management, the portfolio building journey will be a far shorter lived exercise than many will be satisfied by.
     
    Last edited: 16th Jan, 2016
  9. bestor Investor92

    bestor Investor92 Member

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    Thanks Redom!

    equity buffers and reasons when dealing with banks is what i was trying to articulate (rather poorly),

    cheers