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What do lenders view as neutrally geared post-APRA?

Discussion in 'Property Finance' started by Taku Ekanayake, 14th Nov, 2015.

  1. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Hey guys,

    Two part question:

    I'm aware in this current post-APRA environment that lenders are calculating our servicing at 7.5-8%.

    Does that mean your property has to be yielding 7.5% for the lenders to view your property as neutrally geared?
    Or is this a completely different calculator all together?

    Also, any lenders that calculate lower than 7.5%?

    Thanks in advance for the feedback.


    Cheers,

    Taku
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No it would need to be a yield of above 12% (or maybe even 15%) for a property to have no adverse effect on servicing.

    you need to factor living expenses, loan buffers in as well.
     
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  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Rental income would roughly need to be:

    (Purchase price @ 7.5% P&I repayments over 25 years) / 80%

    You'd still need other income to cover other debts and living expenses.

    Let us know if you find somewhere that has lots of properties with this kind of yield!


    Lenders don't really see things in terms of positive or negative geared, they look for surplus income. Similar but not quite the same.
     
  4. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Thanks for the feedback @Terry_w.
    12%-15%?!
    What was it pre-APRA?

    Thanks for the feedback @Peter_Tersteeg. Do you mind explaining that equation on a purchase price of $300K. I don't quite get it.
     
  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Be mindful that even if you can obtain such yeilds, many lenders will cap at say 6 or 8 % and .........then there is that stoopid concept of "rental reliance" where if more than 50 % of your nett income is from rent, many lenders consider you as someone that cant be lent to - sort of like a bankrupt or really poor credit score person

    Lucky, not all lenders are this silly, but I have seen a resurgence of this PC way of saying " go away"


    ta
    rolf
     
  6. Redom

    Redom Mortgage Broker Business Member

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    Some thoughts:
    • Lenders are calculating it at 7.5% of the P/I repayment, not the interest repayment.
    • Rental income is discounted at 80%.
    • Rental income above 6% isn't included by some lenders.
    • 50% of rental income is only included for certain high yielding security types (e.g. serviced apartments, etc).
    • So for a $300k property, 7.5% at 25 year terms (5 year I/O), lender calculation is around $2,216. Noting that rental income is discounted at 80%, the rental income required per month to cover the $2,216 expense figure is $2770 (80% included). That is an 11.1% yield.
    • Note this is to keep your borrowing power the same with one lender, the yield can fall a little bit because not all lenders will calculate your debts held with other banks at 7.5% P/I over 25 years. E.g. NAB and Pepper will take your actual repayment and include a 28% and 20% buffer on top of it.
     
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  7. D.T.

    D.T. Adelaide Property Manager Business Member

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    300,000 loan at 25yrs at 7.5% = 2,216 per month repayment.
    Lenders take 80% of rent to allow for expenses, so to be neutral -> 2,216 / .8 = 2,770 rent per month
    2,770 * 12 / 52 = 639 rent per week or about 11% yield.

    Pretty sure lenders have a cap on yield too right @Peter_Tersteeg ?
     
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  8. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Many thanks for the break down guys. It would be tough nuts to find any properties around metro areas with that sort of yield. Would most likely be a dual occupancy/granny flat job.
    @Redom that's ludicrous that rental income above 6% isn't included by some lenders.
     
  9. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Thanks for the feedback @Rolf Latham. Indeed, very stoopid.
    A further question on this - if my PAYG salary is $100K/year, and my rental income is $105K/year - does that mean that extra $5K rental income is disregarded and I'll still be able to borrow on the basis of $100K (PAYG) + $100K (rental), or do the lenders stop lending to me all together?
     
  10. D.T.

    D.T. Adelaide Property Manager Business Member

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    You'll find different lenders have different policies on it.
    Your broker should be strategizing / navigating a way through so that you don't need to use those lenders at the time when you get up to there.
     
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  11. York

    York Finance Broker Business Member

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    Yep...exactly why a good broker is important. I believe you're in good hands Taku. ;)
     
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  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The NAB has a 6% cap. Keep in mind it's a cap on current value, not your original purchase price. They don't exactly go out of their way to verify the current value if it's not a security property. It's not an entirely unreasonable policy. It was introduced to mitigate risk in some mining towns. Many rental yields in a lot of areas have significantly dropped since the mining boom.

    A few others have a 'rental reliance' policy. For example Westpac will want your tax returns if your rental income exceeds your regular income. This generally reduces your serviceability because they have another quirk which means they double dip on your rental expenses. Mortgage insurers in general have similar policies.
     
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  13. D.T.

    D.T. Adelaide Property Manager Business Member

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    I guess the best bet once you get up to that stage is to quit using lmi?
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    At a certain point (somewhere above $3M) there's a whole lot of policies that start to converge which mean you can't use LMI any longer.

    It used to be that if you went with an 80% or lower LVR you might be able to get an exception to various policies to help you along. It was a big motivation to drop LVRs for many investors. This sort of thing is becoming a rarity post APRA. Policy exceptions (especially around serviceability) are getting very rate.
     
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  15. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Thanks for the feedback. This is much better.
     
  16. daver

    daver New Member

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    Hi,

    Is the 7.5% P/I serviceability calculated for 'all' existing debt (both PPOR and IP), and new loan/topup amount?

    Is the existing debt calculation based on currrent debt (over next 25 years), or original loan amounts (from date of setup ect)?

    Do the same rules apply when pulling out equity to invest into shares?
     
  17. Redom

    Redom Mortgage Broker Business Member

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    Depends on the lender, generally yes with most. Exceptions include some lenders like Homeloans, NAB, CBA, etc, who calculate it differently.

    Based on loan limit not the balance.

    To release equity to put into shares, you need to show you can service the extra debt in the same way as if it were for a car, personal investment, etc.