Second IP - already struggling with finance

Hi everyone! I have been reading these excellent forums for a long time but this is my first post. Thanks for having me! I wanted to get some of your thoughts on some difficulties I am having with obtaining finance for my planned second IP. I bought my first IP in Adelaide (South Plympton) last year -- a 4-year-old duplex for $526k, with a 90% LVR. At current interest rates and with depreciation factored in it is cash flow positive by a bit over $1k per year.

I am now looking at getting pre-approval for my next planned purchase in Queensland (no specific property in mind yet) but I have been rebuffed by two banks so far -- Adelaide and Aussie Select. They will both only loan me around $300k but I am really looking for up to $400k. These two banks had the best interest rates but my serviceability was the problem. My broker tells me one of the issues is that I pay quite high rent for my apartment in Sydney of $400 per week. He is continuing to look for other banks that will accept overtime/penalties and dividends. It is all taking quite a long time.

I earn just over $100k per year, with around $30k of that made up in shift penalties and overtime. I religiously save $400 per week. I also earn around $13k in dividends from over $200k invested in Australian shares and almost $100k in an international managed fund. I'm trying not to sell any shares to purchase property as I want to keep that diversification going.

Is it unusual that I am already hitting a serviceability wall so early on? Is there anything you think I am doing wrong? I would love to hear your thoughts and guidance.

 

This is the new norm. Capping out early.

But do get a second opinion. There are many ways to squeeze a bit more out.

 

Yep, not uncommon. There are lenders who will take all your overtime and penalties, but they aren't the super cheap ones. That said, to put it onto perspective our rates are so low at the moment that expensive is still cheap relative to 'normal'.

 

Thanks Terry. If I had known I would have had these issues I would probably have bought a cheaper house in Adelaide. My aim was always to diversify into at least two different states.

 

Sorry to hear the bad news for you. That's why some people in this forum have indicated that it's not as easy to get finance like pre-APRA days and even if they are able to, they have build their portfolio prior to post-APRA. Not saying it's impossible but def a lot harder and don't believe the stories of anyone claiming they bought 10 properties in 2 years in today's market.

Of course talk to a broker and as @Terry_w and @Jess Peletier mentioned, obtain a second opinion. Maybe you may have a big credit card limit, enormous HECS debt, salary packaging and etc that may impact on your serviceability.

 

You may want to read this, may/may not suit your scenario.

I started a thread on this because I had issues some time ago servicing my development and used RAMS, one of the best lo doc loans around IMO

Great News if you are Stuck

 

OP says he gets over-time so most likely not self employed.

Definitely a good product when it works, but not a silver bullet

 

OK, got it.

However, if it were ME and I could not get loan now I would have plan B ready, get an ABN number now for the future? I think bank will require 2 years???

 

Most will. With RAMS, they can also look at doing the Lo Doc for people who are very rent reliant which can help when things get tough.

Most likely won't work for the average investor who holds a couple of IP's though.

 

At the time you bought your Adelaide property the lending environment may have been very different from what it's now. Things change, they always do. Just another part of investing game. The key is to find a solution and move on.

 

Thanks very much for the responses. They have helped to clarify that my situation is probably due to the much discussed tighter lending standards, rather than something that has been overlooked. It's looking like I will still be able to get a loan for the amount I was hoping for, just at a less favourable interest rate. My broker has just informed me that Bank SA is looking positive -- the catch is the 4.33% interest rate (which I understand isn't terrible, just not as good as some of the others we were looking at). Hopefully this goes through as I'm assuming numerous credit checks on my file will begin to be a problem?

I'm interested to know others thoughts on whether there is a point where it is no longer worth pursuing a loan if the only options available based on current personal financial circumstances are relatively high interest loans. If, for example, I could only secure a loan in the high 4's, would it be better to wait until circumstances changed? I suppose some of this depends on the expected performance of the investment. But generally speaking, do high interest lenders remain high interest lenders?

 

Curious to know why your broker has been submitting deals that don't service? Or did you DIY to begin with?

Re rates, even high rates right now are low. If an extra 0.25% on your loan is going to be problematic for you, it's pretty likely that you need to rethink whether you should be buying at all. Try to ignore what 'others' are getting and decide if the options available to YOU are going to help you achieve your goals, or not.

 

Thanks Jess. I have been using the same broker throughout. With the first pre-approval application, he informed me it was rejected as the lender changed their servicing requirements for a single male (living expenses) a day or so after it was submitted. For the second application, he apologised and said he made a mistake as he had been using an outdated servicing calculator for that particular lender. Both lenders came back offering less than I needed. My broker told me that he has had conversations with the lender we are now looking at and has told them about the mistake and that we want to make sure this one stacks up, and he's confident the application has a strong chance of going through.

Does it sound like I should indeed be seeking a second opinion? I worked with him on my first purchase and he came recommended by my Adelaide buyers agent. Apart from this hiccup I feel the franchise/office has provided good customer service -- they are very fast and responsive. I would feel a bit guilty talking to someone else now, but I understand it is a business decision in the end.

 

It may pay to get a second opinion - no disrespect to your current broker, as mistakes happen sometimes but it may also be that he's missing something fairly obvious - for eg, not including rental income from the new property. This also happens reasonably regularly.

 

I ended up getting pre-approval at $500k with BankSA, 4.33% IO & 88% LVR. I'm looking for a property in Brissy between $300-400k, so this will give me some flexibility. As previously mentioned, Adelaide Bank and Aussie Select were both willing to loan me only around $300k, but at better interest rates. So if I find a good property up to around $350-360k I'll apply with those banks, but if it's above that I'll go to BankSA at the higher rate.

 

You need more than an ABN at most lo doc lenders though. You need GST rego. You need BAS statements and bank trading account statements at most as well......

 

so policy has changed? not so a few years ago?

 

It really does come down to interest rates being one of the smaller components of what makes a good choice of banks/lenders for you.

Even at 1% more than other banks, a different bank with better serviceability that may take more overtime into account can mean the difference between a loan and no loan. If that second IP and loan negates the 1% higher loan interest then it's a good idea.

As @Jess Peletier has spoken about be careful having applications put in which are not suited to your situation as they will make getting a loan harder and harder.

At the end of the day the aim is to get money so don't tied to the lowest interest rate. Seek a good product that is matched to your strategy and situation.

 

Great advice, thanks Westminster. I will certainly base my purchase decision on the potential of the property, rather than the fact I can get a lower interest rate with a lower purchase price. In terms of the loan product itself though, can you elaborate on what might make a good product and what a bad one is when it comes to a fairly basic investor IO loan? This is one area I am not too sure about.

 

I look for
- offset - as you are a good saver then an offset may be attractive if you don't have a PPOR debt for savings to go into an offset
- not crossing the loan. Don't cross the Adelaide IP to the new IP
- professional packages which offer a low interest rate credit card - this is a nice to have not a must have but you can save a lot of money if you have naughty credit card debt
- check what annual fees/loan application fees etc are applicable