Serviceability

Sadly Westpac went from being quite a good starting point, to almost useless. We're having trouble with them for first home buyers! Utterly pointless for the investment market these days.

Despite the most well thought out plans, it only takes an ill informed regulator to start swinging their weight around (despite barley being present for decades previously) and everything falls to pieces.

The net result of all this is unless you're on a high income or already well established in the market, the goal of financial independence through property is moving further and further out of reach. It's still achievable, but it's getting a lot harder.

 

Not entirely true. Pre APRA, there was a clear understanding amongst brokers with experience dealing in multiple property, multiple lender portfolio's - how to navigate from lender to lender to achieve a clients objectives. There has now been sufficient time to absorb the Post APRA environment and come to an understanding of where a framework /mud map for a post APRA strategy can best be utlised.

 

Really? That's good to hear. I thought it was still quicksand to a large extent.

..and NRAS is still calling me, but I've resisted so far

 

Thanks for the hope Peter .
I've been thinking the same for a month or so but haven't heard it said so clearly here.

 

...and @Peter_Tersteeg, how's your work going on plotting a path through lenders to allow good sized portfolios? From your comments, it's not going well?

 

It's not going badly, but the challenge is testing my ideas in a practical environment. I obviously don't want to screw up someone's finances on the mere basis of a good idea. I am currently running an application for myself, but there's only so much I can do in my own right. My own circumstances have limitations (my own serviceability isn't a problem, but my wife's priority is to build a new house, she's put up with our current dump for 12 years).

It's not really a path through different lenders. It's more a way of structuring finances and presenting applications in a manner that negates about 80% of the effects from the recent APRA changes. More like a more accurate rifle than a silver bullet; you still need to aim the rifle properly to take down the target.

 

Ultimately - if I were looking at the right now for a client with a PPOR that offers a decent chunk of equity, and who wants to use it to invest , I'd be looking at

A . PPOR to AMP Variable Offset P&I , and pulling equity to 80% with Master Limit functionality and 10 years I/O . The attraction here is 1- having the equity available to me NOW without having to jump through hoops, and 2 - being able to administer it precisely using the Master Limit functionality. But this is only attractive against a PPOR security. I should point out - you can achieve this with other lenders, but the I/O rate will be a little higher than AMP's and you wont have the same flexibility or 10 year I/O in most cases. Portfolio from STG/BankSA/BOM would be the only exception to this... so is also worth a look.

B. Purchase INV properties using conventional lenders until I ran out of puff, and then switching to Homeloans LTD and FM. Use FM last, as they are now assessing FM debt at 7%, but they still assess OFI debt at actuals.

There's no real shortcuts or workarounds here. If you dont service with Homeloans or FirstMac, you dont service anywhere


If I wanted to be really aggressive and the client had strong equity and was interested in NRAS as a strategy to get way past conventional capacity constraints , I'd take the PPOR to FirstMac (after doing the cash out at the existing lender first, waiting 6 months and then refinancing to FM ) and then I'd buy NRAS properties at 80% or below using FM, as I can inject 80% of the NRAS credit into their servicing calc on 80% deals or below ( if they also hold the PPOR ) - this is ultimately THE strongest servicing outcome available, by quite a distance. Incredibly, because of the extra income accepted by FM, borrowing capacity increases with each purchase, using this approach. But this approach requires someone willing to think laterally and see the forest for the trees
Lots of posts have asked...how can I manufacture extra income? ... there's your answer.

 

ING just announced they are increasing I/O rates by 37bpts from November 5- but if you hold PPOR with them as well , the rate effect wont apply to you

 

I'm all for NRAS as an investing strategy and own a few personally, but i'd caution the risks of using it as a serious 'finance strategy'. I field a few phone calls every month on this, so its probably best to flesh out all the pros and cons (not just the pros!).

With policy changing every few days, i'd be very careful recommending an investment plan to utilise one (at best, two) lenders investing niche. On top of that, that niche is based on the certainty of NRAS payments, which over the last two years, has had a poor track record of being paid on time.

If this lending niche did change, the reality is your borrowing power is reduced with ALL other funders. If you did have a strong income, and managed to purchase $2million worth of NRAS that'd generally yield 5%, you'd actually only be inserting 4% into the serviceability calculators. Thats a $20,000 drop in rental income, or a $16,000 drop in taxable income (80% of which), for almost all lenders.

I wouldn't be recommending to anyone the best way to get around APRA is to go 'all in' on NRAS and FirstMac.

It can however, be very powerful to pay down deductible debt and thereby increase your borrowing power. Thats a bit of a 'investing plan' and well harnessed can rapidly pay down your non deductible debt to help grow a portfolio. Euro's spoken at length about this on SS and it definitely works to aid serviceability.

In saying that, NRAS can definitely be a productive part of an investment portfolio when well utilised. Euro's also the go to man for mapping out how to utilise and harness it well. Just speak to the others and you'll know why.

Cheers,
Redom

 

This is true, of course. What I'm talking about is really more around a situation where capacity at other lenders via a conventional approach had already been exhausted, and where a client still has significant equity at their disposal and wishes to continue investing

Your point about debt reduction is also important RS - whilst the 20% reduced rental income received from NRAS will in the short term reduce your capacity if you were to continue to use conventional lenders, the surpluses from NRAS, redeployed towards non deductible debt reduction, will compensate by removing non deductible debt which would otherwise be assessed at 7.4%+ ... it will , in the longer term, improve your capacity. For example, within 3-4 years you'd have paid down 30-35K of non deductible debt. Within 5 -6 years you'd have paid down 45-55K of non deductible debt, etc etc... There are genuinely powerful cumulative benefits to the debt reduction the NRAS strategy affords.

But when viewed exclusively in context of the FM calc at 80%LVR or below, and where the PPOR is also at FM, the 20% reduced rent (say, $80 per week if we use a $400K property as an example) is more than compensated for by the $8773.60 on untaxed allowable income (80% of $10,917) that you can then utilise on their calculator ...

In that scenario, adding $8773.60 of untaxed income is like adding @ 12K of taxable income , but you are only "forfeiting" $4160 of rental income ( $80 per week) . When accounting for Neg Gearing on that $4160 at 37.5% MTR for example, the net result reduces from $4160 to @ 2600 . This produces a net improvement to income of almost 10K. - and this occurs for each additional NRAS purchase- provided it is sub 80% and the PPOR is at FM. This is how borrowing capacity actually increases with each NRAS purchase when employing this particular FM approach.