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Serviceability hurdle? How to best proceed..

Discussion in 'Property Finance' started by dan_89, 18th Sep, 2015.

  1. dan_89

    dan_89 Well-Known Member

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    Hi all,

    Looking for advice on how I am best to proceed with building my portfolio as I feel I have hit a potential serviceability hurdle.. Current position as below;

    IP 1:

    - Current loan at $304k paying IO.
    - Recent bank val came back at $440k in August.
    - Currently leased privately at $1473 per month.


    IP 2: (currently PPOR)

    - Currently renovating - nearing completion. Would like to stay medium term and subdivide in a a few years.
    - Purchase price 2014: $525k
    - Current loan at $430k paying P+I
    - Current market value based on comparable's: $680-$720k. Aiming to have Val done after deck and landscaping is completed.
    - $10k available in redraw
    - 2 x house mates paying $800 cash in total per month.

    My current income is $70k which will increase within 6 months and I am currently investing alone.

    My broker has noted I have a borrowing capacity around $300k but I have not discussed in depth as I am looking to complete reno's then reval to assess options first - happy to discuss my options with any other helpful brokers!

    As a large portion of my debt is not deductible will this be a
    considerable factor in reducing serviceability? Is there an easy way to restructure my loans to bring LVR higher on IP1 to reduce LVR on IP2?

    Another option I am thinking may be to rent my current PPOR then buy something smaller to renovate, repeat?

    Any advice would be appreciated on how I am best to proceed or what I should avoid moving ahead.

    Thanks in advance!

    Dan
     
    Last edited: 18th Sep, 2015
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  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Putting your PPOR on IO repayments will help servicing with some lenders, and yes, when servicing is tight having a large non-deductible debt in your PPOR can definitely hurt.

    An option would be to rent out your PPOR and rent somewhere small yourself in the meantime. Also, make sure that your broker is including any potential rental income in their calculations.
     
  3. D.T.

    D.T. Adelaide Property Manager Business Member

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    - Change loan to io
    - If you have some cash consider paying it into the loan and refinance it back out
    - Minimise or cancel any personal loans, credit cards, hecs
    - Consider renting the poor and renting elsewhere. This gives you rental income and changes your debt to deductible; 2 big serviceability benefits
     
  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Agree with converting the current PPOR loan to IO if you want to boost servicing - it could help when taking out the next loan with Nab group lenders.

    Having said that - if you go down this path, don't fall into a trap of just making the minimum interest repayments on your PPOR loan.

    Cheers

    Jamie
     
    Last edited: 18th Sep, 2015
  5. Redom

    Redom Mortgage Broker Business Member

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    Hi @dan_89 ,

    Some financing options, rather than lifestyle ones (which can help big time too!).

    This partly depends on which lender your with.

    1. Switch to I/O. This may be easy or difficult, depending on the lender your with.
    2. Check borrowing potential with lenders like NAB, Homeloans and FirstMac - may have more 'firepower' with those calculators.

    Cheers,
    Redom
     
  6. tobe

    tobe Well-Known Member

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    and stop taking cash from your boarders, put it through your tax returns and claim 2/3s of the expenses. Go back and have previous years tax returns amended, and going forward have them deposit it into your account so you have evidence of the income.
     
  7. bob shovel

    bob shovel Well-Known Member

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    And get that bmx track up and running and charge Admission!
     
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  8. dan_89

    dan_89 Well-Known Member

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    Thanks for the above responses!

    Unfortunately i have been so busy with renovating and work the last 8 months that I haven't had a chance to sit down and work out if i'm doing things as I should. In response to above notes;

    I was originally paying IO but the IO term ended recently. On last discussion with my broker she mentioned to avoid the rate increase from ARPA changes on my PPOR I could change to P+I until I refinance which I did. I asked if that would effect my serviceability which she noted it would not as they run the figures as if you are paying P+I anyway?

    Basically I was planning on waiting until I complete my renovations until I refinance as from what I've heard valuers generally don't like "half renovated" homes...

    I currently am not able to rent my current PPOR as I need to be living in the property for a 12 month period due to claiming the first home owners stamp duty reduction.

    I was unsure if I was able to have room mates paying rent during this period so I was charging them cash but after speaking to the SRO there is no issues with them living here as long as it is 'MY PPOR' also.

    Currently my loans for both properties are with Choicelend
     
    Last edited: 18th Sep, 2015
  9. dan_89

    dan_89 Well-Known Member

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    Another reason I would like to keep IP2 as my PPOR for the next few years is to hopefully subdivide and build on the back (STCA). This however i'm assuming would be far more difficult if I had tenants in the front house.

    Would be interested to hear from anyone who has been in this situation?

    I have spoken to a local builder who specializes in subdivisions in the area and quoted approx build cost $260-300k. To obtain the borrowing capacity to do this in my current position I would need to rent the front house.

    I also have no personal debt and pay my credit card off on time each month
     
  10. dan_89

    dan_89 Well-Known Member

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    Haha this is another reason I want to stay put where I am! Haven't had a chance to get started on that track yet :(
     
  11. tobe

    tobe Well-Known Member

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    Correct, you can rent out as many rooms as you like, (and cliam a portion of the interest and other costs) the SRO are only concerned that its also your PPOR.

    Regarding the subdivision, lenders can use the potential income of rentals for the front or back house, or both if you can give them an alternative accomodation for yourself. They can also do an as if complete valuation on the new property to see if there is enough equity to do the new build.
     
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  12. bob shovel

    bob shovel Well-Known Member

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    Another idea. Go to a real estate and put your mates and place on the books and you pay them for a room. Claim the lot! ;);)
    Then you can claim the bmx track as a tenant requested improvement and claim it all on tax! I'm the dodgy advisor you wish you had
     
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  13. Mick C

    Mick C Well-Known Member

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    So your broker doesn't use NAB/ Firstmac/ Homeloans etc...


    I could be wrong but choicelend is Advantage? so you dont have an offset account?


    Sorry to sound so negative,
    Please investigate further on

    1. Changing loan to I/O - Def def will improve servicing
    2. Take out equity asap ( it's getting harder)
    3. Double check your servicing not just with Choicelend but other lenders....if it's to low, change PPOR to IP and rent somewhere yourself given you share with mates i guess you dont mind moving out as per say .


    Regards
     
    Last edited: 18th Sep, 2015
  14. dan_89

    dan_89 Well-Known Member

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    I think I may have just figured out a way to potentially overcome my serviceability issue while remaining in my PPOR.. although it may not be entirely 'by the books'..
     
    Last edited: 18th Sep, 2015
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  15. Richard Taylor

    Richard Taylor Mortgage Broker & Brisbane Buyers Agent

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    If you are going to do what i think you are going to do i would be careful.

    Don't see any issue in getting to where you want to get to with some sensible loan planning going forward.

    Cheers


    Richard
     
  16. euro73

    euro73 Well-Known Member Business Member

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    Talking about servicing - the next policy presenting a servicing hurdle is on the very near horizon..in fact for several lenders they will launch changes within days ... what you're going to start seeing is living expense calculations being linked to individual or household incomes on a more "proportional" basis. In other words, higher income earners will start having a higher "cost of living" applied to them than moderate income earners, etc... The increases will be 20 - 30% more than what is currently being applied. There goes a little more borrowing capacity for higher income earners in particular
     
    Last edited: 27th Sep, 2015
  17. Richard Taylor

    Richard Taylor Mortgage Broker & Brisbane Buyers Agent

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    Already implemented this week Euro by a few lenders.

    Cheers


    Richard
     
  18. bob shovel

    bob shovel Well-Known Member

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    "The more you earn the more you spend" in most cases
     
  19. Redom

    Redom Mortgage Broker Business Member

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    Westpac did that a while ago and are working to tighten the income banding. Its based on income bands, with it rising by location (state by state differences) and income levels.

    Seems appropriate to me. In my charts about APRA changes, i factored in some of those adjustments to living expenses (not by income segments though).

    Cheers,
    Redom