Another lenderr has joined the land of the pixies
- Thread starter Rolf Latham
- Start date
The logic behind this decision is simple enough; more properties equates to more risk. Whilst it's counter intuative and most investors would disagree (myself included), here's the thinking of the people who set these policies...
1. Most property in Australia is negative geared when you consider rental yield vs purchase price plus costs. This means that with every property you purchase, the investors cashflow reduces.
2. The more properties you own the more risk you are of havings any individual property vacant or needing repairs, neutralising its cashflow for a time.
1 + 2 = 3, which is the more properties you buy, the worse your cashflow, plus the higher risk of additional cashflow reduction through vacancy. This directly translates to a higher risk of default by people with multiple properties (regardless of the value of these properties).
The investors arguement is multiple properties means multiple income streams, but given that from a risk managers criteria that a property is negative geared until it achieves a rental yield in excess of 12%, they've got a good mathematical argument that more properties equals higher risk.
And unfortuantely they're the ones who approve or decline loans...
... it would be interesting to see AMPs argument in the case of an investor who owns 10 IPs outright and wants a loan for number 11.
A very good point. Putting together a loan application with 10 properties is a monsterous task compared to dealing with a first home buyer.
Had a chat with AMP this am and this is my take
Because they are a broker based business much of their stuff is already somewhat loaded with high serviceability need, otherwise you would not use them much because product wise, its average,with a couple of policy niches.
They are overweight with this type of lending .
Xpect some more contraction in their availability of funds to segments of the market like WA mining areas, etc
ta
rolf
Because they are a broker based business much of their stuff is already somewhat loaded with high serviceability need, otherwise you would not use them much because product wise, its average,with a couple of policy niches.
They are overweight with this type of lending .
Xpect some more contraction in their availability of funds to segments of the market like WA mining areas, etc
ta
rolf
precisely the q I asked this am
The good thing for us brokers is that the flux means we will never be out of business
ta
rolf
I have calmed a little
Is there any subset to this new policy
Or
Are we assuming that a guy that owns 10 places in Bulimba outright comes to you for a 200 k loan AMP will say no sorry, but someone that has 9 places in Birdsville at 110 %lvr we will take on ? Im not talking about case by case, because that’s unreliable and depends on if the assessor had a fight with their spouse last night.
Its an important one for me, because MANY of my current and future clients will fall foul of that idealogy , and we need to make adjustments to exclude AMP from our fwd planning for those clients, and move AMP into their lending earlier in their acquisition cycle.
Rolf,
As far as I understand it, I haven’t tested it yet – the line in the sand is 10 properties.
So effectively we think yes someone with 9 is okay but 10 is not.
It would be wise to consider other lenders for clients who own, or have the strategy to own more than 10 properties.
Regards,
For argument sake, say the 10 properties are spread across "mining" centres with a rent roll of say $900K with a after tax CF position of +$300K. That would be viewed as risky compared to 9 properties in downtown capital city with a rent roll of say $270K and an after tax CF position of -$20K.
For argument sake, say the 10 properties are spread across "mining" centres with a rent roll of say $900K with a after tax CF position of +$300K. That would be viewed as risky compared to 9 properties in downtown capital city with a rent roll of say $270K and an after tax CF position of -$20K.
There's two risks in the scenario. The risk that the borrower will default and the risk that the lender won't be able to recover their money.
Your mining town might have great cashflow and less risk of immediate default, but there's also a large unknown about the future as many mining towns have had massive rent drops. The risk of default today might be low, but tomorrow in unknown. Unknown factors tend to attract a reasonably high risk rating.
If the mining town rent drops, then values are also going to plumit, so the risk that the lender can't recover their money is also very high.
Compare this to a capital city. Cashflow risk is higher because of the gearing but the chance that it will drop substantially is fairly low. This risk can be quantified upfront so overal it's probably a low risk.
Capital cities certainly have downturns, but long term, they tend to have reasonable capital growth. Money recovery risk is more predictible and thus likely to be low.
Mining towns are thus considered far more risky than capital cities, dispite the cashflow being better.
Investors tend to be optimists and look to how much money they can make. Risk managers and lawyers are trained to look at the downside and figure out what the chances are that the investor is wrong and by how much.
WTF?
But probably quite happy to lend money to a first home owner with 95% LVR with LMI out the wazoo with the wife currently working and heavily pregnant and about to go on maternity leave. (just an example, don't go all PC on me)
as opposed to somebody highly exposed to the rental market and a few vacancies away from bankruptcy. righto mate.
I would have thought that there can be a fair bit of a difference between someone who is highly exposed to the rental market and someone a few vacancies away from bankruptcy.
that may be true for somebody who is not geared.
Hmm, so that would make the majority of the success stories on this site a few vacancies away from bankruptcy then. Daz, Nathan, Hotrod, Rixter etc are all highly exposed to the rental market and are geared.
So what's your point? Sure it's easy to be successful in a boom as has been the case over the last ten years. What counts is how well you can manage in a downturn.
Sort of agree on the second bit, but disagree bigtime on the first
Just getting out of the box and making any form of start to get into the market is the key thing. If it were not, many more peops would lose the excusitis and get into investing and business of all sorts.
In my view getting off the blocks is just as important as managing the ongoing risks and process.
ta
rolf
And that too.
But there are those people a few vacancies away would wipe them out and others that a few vacancies would mean squat.
But again one vacancy on one IP is a big hit compared to say three in ten.
A few vacancies are just that, just a few.
Probably had one place vacant for four weeks max in ten years. The others maybe a week between tenants.
these rules are made up by salaried bank employees a little bit disjointed from reality.
yeah but dont let back room logic get in the way of common sense.
The best one in my book of stories STILL to date is
Rolf: Hi Credit, so why did we decline Mr and Mrs loan..........
Credit: Because your client cant afford the repayments on that Interest only Loan they are seeking.
Rolf: I do understand its tight on deemed lender servicing, but we have done our homework pn this, and you can clearly see the borrowers save around 1500 a month on top of the mortgage payments, on the 18 mths of savings statements we provided.
Credit: Ok, we see your point, but under our deemed model, the borrower can NOT afford th Interest Only Repayments, but we believe the clients risk will be improved if we grant them a 20 year PI loan
Enough said ........... in truth we dont really give a rats about the borrower, we are much more concerned about our LVR risk margin.
ta
rolf
