Servicability issue

Guys,

what to do when broker told you have equity available but you cant release it due to serviceability issue? broker told i need to increase my PAYG income.. is there any strategies to overcome this or just sit on sidelines for a bit until income improves?

 

You could potentially get a 2nd opinion from another broker to be certain.

Alternatively, look at what non deductible debt you have (PPOR mortgage, personal loan, hecs, credit card, etc) and see if you can reduce any of them?

 

thanks D.T

 

Did your broker look at changing lenders, or just looked at servicing with your current lender?

It seems obvious but you never know....

You also could look at changing any loans on P&I to IO, this will definitely make a difference with some lenders, and making sure your current rates are competitive. Every little bit helps.

 

Part of the challenge might be that you're reached your serviceability limit with your existing lender, although possibly not with other lenders. Moving lenders isn't an ideal solution, but sometimes it's the only one.

Unfortuantely the regulatory changes we've seen coming through over the last 6 months have made servicing issues a very common problem.

 

@jess yes my broker already looked at changing lenders but due to APRA new lending restrictions not possible at this stage and all my loans are IO only...

is it worth to have second opinion with another broker?

 

If you've exceeded servicing limits with your existing lender and all others, there's not much you can do other than reduce debt and increase income (neither of which is a quick solution).

There are still a few lenders around that haven't changed their servicing models and they're certainly more generous than the mainstream lenders. Decent rates too. Not the solution for everyone, but worth exploring. A second opinion would be worthwhile.

 

Get your broker to run the numbers using Homeloans Ltd Accelerate product and if that fails get them to use Liberty and if that fails then its off to the sidelines.

 

Thanks Peter and Shahin

 

looks like i need to be sideline for a while ...

now need to look for new strategies to overcome this

 

lol - pretty much the approach I've been taking these days with those close to the dreaded servicing wall.

Check out Advantedge/NAB too - not quite as a generous with the lending calc but might work with them as well....although their recent changes to living expense calculations have made them less generous these days :-(

Cheers

Jamie

 

For those in WA P&N are still using actuals as well. Best under 80% if possible.

 

Perhaps Lo Doc, RAMS?? need accountant to sign off on income, perhaps an interim measure??

 

Although not in the same situation but probably will hit the serviceability wall after my next purchase. Would it not be better to start paying principle and interests to help with reducing debt?

 

Speaking of servicing restrictions ( and in this case LVR restrictions as well ) here's some interesting reading about what Ireland introduced @ 12 months ago...

Central Bank of Ireland - Central Bank announces new regulations on residential mortgage lending

Five things you need to know about the new mortgage rules

New rules 'restrict mortgages to people with rich parents' - Independent.ie

Q4 2015 House Price Report


The consequences appear to be that Dublin, which grew at 25% in 2014, has slowed to 3% growth in 2015, while cheaper areas outside Dublin , which were growing at 3% in 2014, have grown at 13% in 2015....

Interesting to note that Dublin, which like Sydney is far and away the most expensive market , has slowed dramatically, while cheaper markets ( Brisbane and Adelaide and larger regionals might be the Australian equivalent ) have seen some growth in the 12 months since the changes... although nowhere near the growth Dublin ( Sydney ) had seen in 2014, before the restrictions were introduced.

I wonder whether we will follow a similar trend over the next 12 months???


But more frighteningly - hover your mouse over the Orange dots on this link and see how far below "peak" prices still are in Ireland, after the GFC.... OUCH!

House prices predicted to rise by up to 5% in 2016

 

Interesting reading. Thanks @euro73.

 

@karmark, This is how I have used Cashbonds/Annuities to increase serviceability....

When you have a few IPs under your belt serviceability will eventually become an issue. The banks/lenders will not lend you money due to you not meeting their lending criteria. As you know banks/lenders work out serviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to DSR. In other words not enough cash flow income to service their debt. Now this isnt really a problem if you can increase your income, so how can that be done....

There are many ways - the main ones most investors know is to increase your PAYG income and/or increase your rental income. As these methods are fairly reliant upon and restricted to market conditions a lot of investors get stuck on where to go to from there. Most overlook the store of equity they have available from low LVR's created over time due to past capital growth.

That's where a Cashbond or Annuity comes into play - which is method I have implemented to get around the lack of serviceability issues to allow me to keep accessing finance to build my portfolio.

A cashbond basically works by converting existing equity into cashflow for the purposes for increasing your income in the eyes of the banks/lenders.

The way it works is as follows - you purchase a Cashbond/Annuity or guaranteed income plan from an insurance company or bank. That income plan is then paid back to you, either monthly, quarterly, 6 monthly or annually over a nominated term. The minimum term is one year and maximum term is 50 years. Which term best suits depends upon the equity you have available, your annual income increase required and the banks/lender minimum requirements. I use 5 years with CB purchasing funds from offset accounts and LOC's

For example if one purchased a $100k cashbond over a term of 5 years, each year you would get around $20,000 plus interest paid back to you. Now when one goes to a bank/lender for a loan to purchase the next property, 100% of the extra annual income's shown on the INCOMES side of the loan application cumulatively to existing PAYG Income & rental incomes...You have effectively increased your borrowing capacity from the annuity income, in the eyes of the bank/lender.

If LOC funding is used one is effectively purchasing an income stream and therefore it comes at a price. That price is brought about by the interest rate differential between LOC & annuity rate earned. One should examine their own personal situation before deciding whether its viable for them only after having explored and/or exhausted all other less impacting options available.

This how I have been able to keep borrowing for income producing and lifestyle purposes. Now I know this method is not for everyone. It's an advanced strategy for experienced investors with substantial equity sized portfolio's based around one's circumstances, investment strategy, goals, time frames & individual investor risk profile.

Hope this has provided you & anyone else with some food for thought.

 

Really interesting method - thanks for the explanation.
I assumed that the banks would simply see that you've only got the particular income stream for a fixed time (5 years in your example) and would pretty much ignore it since it's not a "permanent" income.
For the brokers, and rixter, is there a minimum time for annuity income for the banks to accept it as "income" on that side of the ledger (as far as loans go at least)?

 

I have never had a client with an annuity income, but recall Westpac used to include income from an annuity for servicing purposes. Minimum 5 year term for the annuity.

What people used to do was to cash in the annuity after they got the loan and this would release their cash back again.

Not sure if this still works.

 

Thanks Terry.