serviceability insights

Hello great people,

Is it true that lenders when assessing take only 30% of annual gross wages and 80% of total rental on an investment property into account when working out serviceability?

So the amount of property one could potentially purchase is more reliant of the rent returns than actual wages?

Let me put it this way also: would ones serviceability increase more from a 10k income rise or a rental rise of 10k?

Thanks, interested to see if anyone has looked into this closer

appreciate the comments

 

Are you on full time employment? Lenders do discount incomes, but not at 70% discount unless they have a good reason to.

 

Not really. It is much more complicated than that with lots of behind the scenes calculations that we don't see.

 

No, They don't count yields over 7 or 8% so if you already have a yield of 8% a rental rise of 10k might not help. They may give a loan for an overpriced poor performing property with high costs, body Corp fees etc, losing money, earning 3% exacerbating affordability in some areas. And they wont lend for properties that pay for themselves 3x over, so exacerbate supply shortage in others areas. So go figure ! Depends on many things including postcode.

 

To answer your question 10k in wages can be better than 10k in rent.

 

Generally its 6% at most lenders

They may approve a loan for anyone who qualifies, including those who own or are purchasing higher yielding properties.Its much more than rental income or yield that affects borrowing capacity. Income. secondary income. rental income. debt including personal loans, car loans, novated lases, credit card limits, the number of dependent children, remaining loan terms, IO v P&I... these all have an impact.

The postcode might affect an LVR under some circumstances.

 

See... everyone gets something right eventually

 

Lenders accept 100% of gross salary and their calcs usually apply tax to that figure. Some lenders prefer net income..

Some lenders also accept 100% of o/time, bonuses and commissions where they can be demonstrated to have been ongoing for 12 or 24 months - but most "shade" secondary salary sources these days

80% of gross rent used to be the norm, but these days several lenders take 70% rather than 80%.

neg gearing addbacks vary between lenders as well.

Living expenses/HEMS can vary as well...

There are all kinds of little nuances in servicing calcs. For some borrowers with very simple profiles such as simple PAYG earner with no o/t, bonus or comms, no other debts, no dependents, the differences between lenders is minimal.... for others, such as multi property investors with lots of debt, the self employed, those who act as guarantors, those who utilise trusts and any other number of situations, things can be quite different between lenders...

There is no one size fits all calculator or set of policies, is the point. Speak to someone who knows what they are doing - ie a broker ...

 

Great comments and I see that its not a straight forward thing as different lenders all have there own individual criteria that you must fit into.
By the comments it would seem that the statement of the 30% & 80% which I read about is incorrect.
An increase in wages of the same amount would possibly have more effect in borrowing power depending on the lender it would seem

I do hear a lot of investors adding in a cash cow to their portfolio's so they can continue lending when they get close to the lending ceiling, so their must be some impact on the serviceability side or are they just assuming that will work?

Thanks for the comments I do find it all very interesting

 

Not many properties have 6% rental yield so it's possible adding a 'cash cow'
(if there is such a thing) can help serviceability however an increase in wages is more beneficial in general, 100% (forget the cash cow)
Most, if not all, of those investors wouldn't be assuming, they would have a good mortgage broker helping them navigate the waters and I suggest you do the same if you haven't already.

 

The value of a cash cow in a portfolio can be measured different ways; but I would suggest that

1.A cash cow which can generate enough income to make extra repayments so you can pay down debt faster than you'd otherwise be able to, is helpful. The reduction in debt - especially non income producing, non deductible debt such as O/Occ debt, personal loans, car loans, HELP debt, credit cards etc - will assist borrowing capacity over time. Remember that some debt removal is more powerful than other debt removal ... getting rid of car loans, novated leases, help debt, credit cards , personal loans etc is extremely helpful for example... more so than removal of PPOR debt.... but it all helps.
2. For those without PPOR debt or other non income producing , non deductible debt, a cash cow could instead enable you to use P&I rather than IO, which can also assist borrowing capacity and has the added bonus of helping you avoid holding cost issues later on.

If you are lucky enough to get your hands on a cash cow that can run P&I and still generate surpluses so that extra repayments can also be made, that's the holy grail .... hard to find.... I specialise in that space .

Just keep in mind, on the serviceability calculators, the impact of a cash cow may not be instant. Most lenders cap usable yields at 6% , so the yield itself can only help so much..... it's the debt reduction from the surplus cash flow that produces the longer term impact.......

Wage growth is obviously also useful, but it needs to be pretty significant to produce a material difference in borrowing capacity- especially if you are running car debt, credit cards etc, and /or running IO debt on INV properties..... and worse still if you are running IO on lots of INV properties.... the more debt you take on, the more properties you own, the more pay rises you need to keep going ....

Maximum money in, minimum money out and P&I repayments works best on servicing calcs.... so as a general rule - wage growth and debt reduction are the two most powerful things available to someone who is at or near their borrowing capacity limits Employed correctly year in and year out they can be of great value over time. Compound is very powerful. But as noted above, yields are capped at 6% generally and big wage growth is necessary to make big advances in $$$ power, so they aren't magic bullets that solve everyones issues instantly .... they are just part of the equation and need to be applied as part of a strategy over time. But if you ignore them, the servicing ceiling becomes an almost impossible barrier to pass for years and years and years, once reached. You would need to sell stuff or hope for pretty chunky wage growth, or hope APRA allows"actuals" again....

A note - Equity from growth will do nothing to improve borrowing capacity. Its great for the ego and its great if you are selling, but it doesn't change borrowing capacity one bit of itself. Anyone suggesting it does or will or may or might or can , is lying to you. It's only useful if you can harvest it... which requires passing a serviceability test.

#cashcowsrule
#theoriginaldebtreductiongladiator

 

If they're expecting this to work within a few years of purchase, they're mistaken. There isn't any such thing as a true 'cash cow' that lenders will find acceptable in the short term.

In another thread, I did some modelling which indicates that even with the current low rates, a property needs a 10%-12% return on the amount borrowed to be considered 'neutral' for bank servicing. For the most part these properties don't exist. Those that do have some extraordinary risks and the banks will only take a 6% rental yield on the property value.

A better strategy is to find a property where the rent will grow quickly over time, rather than one that has a high (but often stagnant) rental yield today. In the meantime, employ additional strategies to increase your income and pay down debt quickly.

 

Equity from growth could help serviceability only by selling the property. Where borrowing cap is limited to say 3 properties one could be sold off every 5 years or so and the proceeds used to debt recycle and pay down remaining loans and then another property acquired with borrowed money.

 

30% of wage to servings debt is maybe what they meant?

 

Do lenders discount income from dividends/distribution from listed companies? Or do they take the full 100% incl franking credits ?

Also, do margin loans where the dividend exceeds the interest impact serviceability?

 

It varies between lenders. Some lenders don't count margin loans, but also don't count income from shares.

Others will apply a deeming rate - of about 2.5% - to any share portfolio, while others will take 100% if it can be shown in tax returns over 2 years.