What is my Borrowing Capacity if.......?

Hi,

I have 1 x OO and 1 x IP. I am looking to purchase IP2 and IP3. My borker informed me that my BC (Borrowing Capacity) for IP2 is as follows:

- With a 4% yield, my BC is $450k
- With a 5.5% yield, my BC is $550k


Now with IP3:

Assuming I get IP2 with only 4% yield:
- With 4% yield for IP3, I am tapped out (no BC)
- With 5.5% yield for IP3, my BC is $330k

Assuming I get IP2 with a greater yield at 5.5%:
- With 4% yield for IP3, my BC is $300k
- With 5.5% yield for IP3, my BC is $450k

What should my stratgey be to maintain a high BC for IP3? I am looking at these 2 x properties for IP2 now, but not sure which one is better for my BC for IP3:

1) IP2 in Adelaide
$560k sale price, 4.75% yield


2) IP2 in Regional VIC
$420k sale price, 5.50% yield
This has a higher yield, but because I am using only $420k BC of the total $550k BC that I can use for IP2 (refer underlined bit above), do I lose out on BC for IP3 then, i.e., if I don't use up the BC for IP2, then do I lose it when I go to IP3?

errmmm......a lot of numbers and scenarios I know, but anyone out there who can help me? I just need to forward plan now.

 

Did your broker say which lenders they are basing these calcs on?

 

Yes, it’s Firstmac. Why is that?

 

Just wondering whether you would get more if you go a little further down the legbreaker scale.

 

Sorry, didn’t get what you mean by “legbreaker scale”?

Also, do you have an answer to what I was asking? Would appreciate a response to that. I am close to placing offers for IP2, but need to know how it affects BC for IP3 before doing so.

 

Firstmac is generally considered a third tier lender. One that you use when none of the others will lend money. There are a few lenders that are more generous, but if you're going to Resimac for IP 2, there's a good chance that you'll be waiting a while for IP 3.

With that in mind, I wouldn't worry too much about the immediate cash flow position, I'd be investing for growth in both property value and rental income. It's probably income growth that's going to help you most in the longer term.

 

Thanks for your reply. I am eager to get both IP2 and IP3 by say Dec this year. Reason being that I want to head back to Sydney by year end or start of next year at least. I am working in regional NSW and getting paid more because of this (say 30% more). This has also helped push my borrowing capacity to an all time maximum. While the money is good, I can’t keep going like this forever. I need to head back to settle down, but before I do that I actually want to max out my borrowing capacity that I get with my increased income, and I want to focus mainly on growth assets. I know this might be a bit risky in the sense that I shouldn’t be o borrowing too much for based on just on one income (single now too), but for me, it’s not hard to live even on 25% of my income with the rest going for savings and paying off debt. At the moment, I am paying P&I and can still save. So anyways back to my story. I am looking to develop my short term strategy - buy IP2 and 3 now before I head back to Sydney, which decreases my pay and borrowing.

If the above 2 properties I mean roomed above say have the same growth prophecy’s, which one should I go for?

Also, why do I need to wait after purchasing IP2 before purchasing IP3? I just settled IP1 in May 21. I am going again. Firstmac didn’t halt me or make me wait. I got the pre-loan a month after my IP1 settled.

 

Also keep in mind. If you are maxed out you will find it hard to upgrade the ppor in the future.

 

Ask your broker specifically why they've recommended Firstmac. I suspect it's because your borrowing capacity is limited and you won't qualify with other more mainstream lenders.

I'm not suggesting you wait for IP 3, but if you don't have the borrowing capacity, IP 3 may not happen until income increases or debt reduces.

This is speculation on my part, but a common reason why Firstmac is recommended is limited borrowing power.

 

I'm not sure how Firstmac is but just be aware 2nd and 3rd tier lenders can cause you a bit of headache in the future.

I had to use a third tier lender when I reached over 15+ loans when I was still growing my portfolio and mostly they are ok but getting them to reduce rates is a PAIN in the ass literally.

They wont even allow you to get a LVR recalculation even after the property has grown 40%+ without a new application even though you are a customer and you already have the loan and you need to get approval from senior loan ppl and escalate whenever you want a rate review.

Luckily after I got several loans with tier 3 lenders I was able to move some of them away to smaller banks but I've got about 4 loans stuck with them still.

Highest interest rates I'm paying as well. So just be-careful. You might be stuck with them if your unable to refinance in the future because of your serviceability.

 

I've had CBA/ING and Suncorp all reduce my LVR on my loans without the need for reapplication. Only Pepper are saying that I need to do a brand new application on a loan that I already have with them.

 

True. I am aware of the consequences of maxing out with respect to upgrading my PPoR. I am not intending to upgrading my PPoR anytime soon. Not sure if I ever will be; but I don't want to wait and see either; thought I invest now itself. How many times have you heard property investors say "wish I had invested earlier?".

 

Yes, my BC is limitted. I can qualify with some mainstream lenders for IP2, but that's with a higher deposit amount, and for IP3, it's only Tier 3 lenders that will lend - Firstmac, Pepper Money, etc.

My borker has already calculated the BC for IP3 as per my first post in this thread. I wanted to know which approach to take for IP2 to keep the BC for IP3 high. The obvious answer will be the Regional VIC property because that is higher yielding, however, I only use some portion of the C for IP2 and not most of it. Basically, what I am asking is if I don't use up all the available BC for IP2, then do I lose that portion for IP3 or can it "sort of" get transferred to IP3?

 

Yes, good points. Thanks for that. My plan is to let the LVR increase for the properties whose loans are with Tier 2 lenders, and then refinance to other lenders - Tier 1 preferrably or even Tier 2. I like to keep my loans with the most stringent lenders (major banks), and work my way down to the least stringent. Wherever I can, I will move it up a Tier, but to secure a property, if I need to move down, I will.

The rate from Firstmac is only 2.99% for IP2 and IP3 which is not bad.

Any ideas on which way to go - higher yielding Regional VIC property or loewer yielding Adelaide property? Assuming both have equal growth propects, you would think the VIC property is the way to go, but would this mean I lose out on BC for IP3 as I didn't use all of the "available" BC for IP2?

 

Considered Pepper, but didn't decide to go with them because of the really high rates. I have considered 86 400 too, but no good for me.

 

Things change when you have a family.

 

Very true, but I don't see it happening in the next 2-3 years.