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Tiered living expenses - question for broker

Discussion in 'Property Finance' started by imbi3, 19th Feb, 2016.

  1. imbi3

    imbi3 Well-Known Member

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    With the major banks now moving (or already moved) to tiered living expenses, how do brokers/borrowers find this? I assume this would affect borrowing capacity significantly, especially for high income earner. Would like to get your thoughts, whether this could affect property prices? Together with budget year, property market is surely up for an interesting ride in 2016
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    It's a bit of a PITA

    Especially when some lenders are taking your salaried income + rental income to decide what your basic living expenses should be.

    It's a silly approach - it implies that someone who receives rental income is rolling in the cash....it doesn't take into account that there's usually some sort of loan to pay back plus other holding costs.

    Cheers

    Jamie
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I've done some modelling on how they've implemented this. As Jamie has indicated the more rental income you earn, the higher your theoretical living expenses get. There's no consideration to the debt you take on, nor do they reduce living expenses if you've got other loans. They're basing the numbers on gross income, not net income.

    In short, the implementation is highly flawed and a disaster for investors. I've approached several lenders regarding this, but they don't appear to care.
     
  4. Redom

    Redom Mortgage Broker Business Member

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    Agree with Jamie that the application of it can be a bit silly - it should only be based on salaried income, but that does make it tough to implement too (what if someone relies solely on rental income and has $500k of it tax free).

    The theory behind the changes makes sense IMO though - people who earn more and live in certain postcodes spend more generally.

    In terms of impact on property prices - this alone is part of a broader sweet of APRA changes that have curtailed borrowing power significantly. As a suite of changes, it has already had some market level impacts and reduced demand for credit, particularly from investors.

    IMO the biggest impact isn't necessarily the change in living expense calculations, but the change in how debts held with other institutions are assessed.

    Cheers,
    Redom
     
  5. Coota9

    Coota9 Well-Known Member Premium Member

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    Another nail into the property investors coffin it seems..
    nail-in-coffin.jpg
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Nah - it just takes a little creativity and a new look at your strategy. A coffin is a bit final :)
     
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  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The problem with the way lenders are assessing risk is they're looking at each component in isolation. They're not considering concepts of cause and effect or looking at the bigger picture.

    Total income goes up as you buy more properties, their response is that you'll spend more. They don't consider that you'll also take on more debt and probably decrease your spending because your cash flow actually reduced.

    Assessment rates are used to hedge against future rate increase but there's no consideration that rate increases are likely due to inflation which will also effect income (and on the flip side it'll increase living expenses).

    Kind of like Steven Kean consistantly predicting a crash with 40% price drops. His prections would probably be correct if governments, businesses, people and markets in general didn't react to changing conditions and mitigate the problem.
     
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  8. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    It has lead to a significant drop again in capacities - particularly for those who have a few properties as the gross rents may be adding another $1000+ per month in the expense column from inflated living cost increases.

    I've run scenarios where a single applicant on 50k a year with three properties has their living expenses inflated to the point of having an adult aged dependent, likewise in some cases a small family.

    A more prudent measure would be looking at net rental income (gross rent @ 80% - actual repayments) at a minimum.
     
  9. Coota9

    Coota9 Well-Known Member Premium Member

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    Was a little tongue in cheek I guess but investors that need to refinance large borrowings at the moment would be nervous-P&I Loans only,Serviceability increases etc
     
    Redom likes this.
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    This is where we start getting nails in coffins - an inability to extend IO terms across a portfolio can definitely impact not just an investors ability to keep growing, but even hold onto what they already have. Keeping debt levels manageable is key now, and where the strategy tweaking has to come in.
     
  11. albanga

    albanga Well-Known Member

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    @Redom whilst I don't doubt the calculating of other OFI debt is a significant adjustment it is only affecting a small portion of the market "investors".
    The new expense calculations are going to have the greatest effect on property prices, no doubt! I am seeing this first hand at the moment, my recent servicing test was appaling and I earn close to 100k. When you need to make tweaks to get a sub 300k land loan across the line you know things are bad.
     
  12. imbi3

    imbi3 Well-Known Member

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    My employer is going down the path for tiered living expenses. Would be interesting to see how it affects the number of applications we receive and our approval rate. I haven't had the details yet but I guess it will be very messy

    Also, how are self employed people going to be treated? Someone may have a very low personal taxable income but the business may retain all the profit. Or the business could have a lot of deductions which could be added back such as depreciation, but very low taxable income and hence low living expenses
     
  13. euro73

    euro73 Well-Known Member Business Member

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    Redom is correct . And combined , these are the two big "levers" that have changed the game completely - the sensitised assessment rates PLUS the scaled Household Expenditure Measures.

    In real terms, a couple earning over 140-150K combined , with a couple of INV properties and @$1Million of debt, are down @ 40-45K in income, on a banks calculator. Of that @ 30-35K of that is from the sensitised assessment rates replacing "actuals" and the balance is the indexed /scaled HEM's.

    Consider those numbers properly for a moment. Really consider them. Now ask yourself whether you really believe that almost everything investors have come to rely on as "givens" from 30 + years of deregulated /expansionary credit markets - consistent growth, the ability to harvest equity almost at will and continue to expand a portfolio.... wont change under a more regulated credit environment.

    I'll be the broken record again.... focus on debt reduction if you want to grow your portfolio.