Serviceability

Is it owner occupied non-deductible debt you are paying down?
If so your borrowing cap will improve as overall debt is decreasing and when you reborrow the interest will be deductible

 

No, all properties are investments. We are currently paying extra into the largest loan (still on I/O repayments) with the greatest equity.

 

In that case it probably won't make much difference in serviceability if you pay down chunks of capital. You might be better to just save this in an offset account and use it directly.

But it will help if the exisitng loans are changed to PI.

 

Ok, so it seems we have the correct understanding. Our broker suggested we pay extra into the loan to reduce the loan amount. I also recall our broker mentioning the BDM for that particular bank/property mentioned for our last equity release that we needed to pay down some debt. We were initially saving money into the offset rather than putting it on the loan. I think we will go back to that for flexibility for future purchases if/when the situation improves for us - i.e. we find a helpful leprechaun with a pot of gold!

 

I think we will stick with extra funds in the offset and see how we go. It seems to be the most flexible option. Ultimately with paying P&I or extra money into IO the bank could just flatly refuse that we access any money regardless. At least with the offset we have control over the funds.

 

@Magnet which bank are you with or intending to use?

The reason there's a best, medium and worst case scenario for servicing after paying down loans is because lenders treat existing debt in various ways:

Best case: The lender assesses existing debts by the same criteria as new debt, such as NAB where both are treated as P&I at 7.4%. Paying off a dollar on an existing debt allows you to borrow a dollar more. Most lenders do this.

Medium case: The lender assesses existing debt more favourably than new debt, such as the CBA, that takes the amortisation amount and adds 20% for their commitment figure. It's a lower figure than what they assume for the new debt, so you're slightly better off to keep the existing debt and reduce the new debt.

Worse case: The lender assesses existing debt at actual repayments, but uses higher assessment rates for the new debt. Liberty and a few other private funders do this. The existing debt commitment is much lower than the new commitment, thus you're significantly better off not paying down existing debt and using your savings to borrow less instead.

As Terry pointed out, paying down non deductible debt and replacing it with tax deductible debt does help you. However unless you're in the highest tax bracket, it'll only help you in the best case scenario and almost never the worst case. You can also access this benefit in all scenarios by debt recycling rather than paying down debt directly.

In the immediate term, the best and most flexible solution is to save your money in an offset account, which will give you the choice of what to do when the time comes.

 

Yes, this sounds Iike a good plan.

 

If your trying to do them all in a short time and high dollar value and negative cash flow then yes.

 

Too simplistic a way to look at things.

In fact the 100k properties are more likely to mean your going to have a larger $ portfolio before stopping.

 

Sorry @Peter_Tersteeg actually replied to some of your questions but somehow stuffed it up!

We are with St George for largest loan with has approx 130K available equity. Have 3 in total with St George totaling close to 1.1K loans and 1 with Macquarie for just under 245K.

We are not in highest tax bracket. Haven't checked recently but probably 2nd highest bracket.

Looks like we have to think of a way to earn more $$$. We have 3 kids and life is already a constant juggle. Kids come first so will have to think of something extremely flexible.

 

@Magnet I think St George falls into the second category I described, I believe Macquarie is in the first.

The good news is with St George it's usually fairly easy to implement some debt recycling, rather than just paying off the loan.

 

Thanks @Peter_Tersteeg that is useful info to know.

 

I know of a broker who exploited a blindspot with one of the big four who have a strong focus on salary payslips. Seems super risky, key ideas below.

Only some loans were disclosed, a dedicated savings account to receive salary payments as supporting documentation. The bank didnt pay attention to events on the credit report (so rule out CBA as they check everything) which wouldve cleared showed other debts, and the broker ended up getting approval for his client at sub 4% for about half a mil. A straightup serviceability check wouldve shown that he was over his limit based on current lending criteria.

apparently this tactic has been deployed by this broker for investors with multiple properties, including he claims, a lending manager at that bank who flagged this loophole (just a rumour of course).

Not sure if this loop has been closed yet but I can imagine some brokers may be willing to toe the line, thrawt APRA mandates and get loans for clients. pretty risky IMO as the broker would be facing some heat if the bank didnt have this blindspot.

A good broker should know how to play the system and exploit gaps and weaknesses. This one seems just shy of the "make a fake chinese company and claim you earn lots there" tactic that got killed off a few years back.

Thoughts?

 

Sounds about right... Thanks for the second opinion. Pretty sus and hopefully they close it if its a known thing. Especially if theres banks like Liberty who are happy to step in and lend. Its not like theres no second option.

 

So our broker has suggested two options to move forward with our investing goals:-

1. Do a total refinance away from St George (not sure who with at this stage.

2. Save roughly $60k into the offset as we had planned to do over the next 12 months and use this to buy our next property. This may be somewhat limiting if we have to do an 80% lend though as it would equate to a $240K property which would be slim pickings for the areas we were thinking of.

Are there any pros and cons to the above two options we may not have thought of?

We haven't discussed these with our broker yet, she sent us a quick email with the above suggestions.

 

@Magnet - what's the benefit of moving from St G? Can you access more equity elsewhere? Have you paid LMI at St G that you can potentially get a credit for when releasing equity?

Just a couple of things to look at before you move. And make sure you're not crossed after the refi.

 

Yes, on paper this looks attractive . The 30% loading on other debts should make their calculator very good, but they don't take any add backs for neg gearing . This means that their calc is good for maybe the 1st or 2nd investment purchase, but pretty well offers no competitive advantage for multi property holders. In other words, the latrobe advantage is no real advantage at all. Its an urban myth Im afraid. Firstmac , who assess at 7% but also use 7% for neg gearing ( nice little niche) are generally the next best lender after Liberty, for servicing purposes - but only to 80% LVR. After that they have to use the Genworth or QBE calc, and their calc goes middle of the pack again.

 

And that's before you start looking at the fee's which go to the moon - they're not a viable option for mainstream lending.

 

Latrobe = specialist solution. Great solution provider as they have answers to most scenarios sub 80%. Not one for standard deals - fees tank it. I find Pepper (via Homeloans) aren't too bad servicing wise, policy can be quite restrictive though.