Yield of IP to not affect borrowing capacity?

Is there a general rule on the yield required from an IP to not affect borrowing capacity with the big 4 banks?

If they assess debt at 7% does that mean that a 8% yield wouldn't adversely affect borrowing capacity?

 

It used to be around 12%, but probably more now.

 

It's is easier to think about the 'debt yield' (rent/loan limit). Assuming a 7.25% assessment rate, $500,000 loan, the bank will accept 75% of rental income, over 30 years, the bank factors in the effect of gearing at the assessment rate and principal and interest repayments.

The debt yield is ~11% not to reduce borrowing power.

Now, most banks do not factor in the effect of gearing at the assessment rate, if this is the case, the exact debt yield will depend on your marginal tax rate. But this is also where a good broker comes in.

Becuase I disagree with the above I better show my workings.

Repayment on $500,000 @7.25% over 30 year = $41,309.81 p/a
To cover that repayment with rental we need $41,309.81 / 0.75 = $55,079.75 (55,079.75 * 0.75 = $41,309.81)
$55,079.75 / $500,000 = 11.02% debt yield

The actual rental yield will depend on how much equity you put into the property. But as Rolf said, some banks restrict the maximum rental yield.

 

Not the lenders I use

On a $500k loan over 25 years, the debt yield, assuming the above assumptions hold would be 11.7%.