borrowing power for an investment property

[corrad]

Does anyone know how banks calculate the borrowing power for an investment property? Reason being it appears lot lower than a person's primary place of residence.

Let's say I make $80K per year, with no other debts. Most banks would allow me to borrow about $450K, which equates to about $3000/mo, or $700/wk in mortgage, at ~6% over 25 years. Now, if my IP also generates about $700 per week in rental income, plugging this amount into banks' calculators only increase the total borrowing power to about $650K (or about $4200/mo in mortgage payment); a difference of only $200K. Why does my PPOR affords me to borrow $450K versus only $200K for the investment property, given that they are the same monthly payment amount of $700 each?

Granted, banks do consider expenses associated with running an IP, however, even if I were to factor for example $100/week in expenses, the rental income of $600/wk should allow me to borrow way more than $200K for IP.

Thoughts?

 

[Aaron_C]

Well you haven't given enough information to work that out....

In any case, the reason for the discrepancy is probably due to a) an error in the input and b) if you buy an investment property you have to pay rent somewhere so that adds to your expenses.

 

[Peter_Tersteeg]

Don't get too hung up with the banks online calculators. They're a sales tool and for the most part they don't reflect the banks actual policies in which the banks use to determine your borrowing power.

If you want a quick and accurate comparison of your borrowing capacity with various lender you should discuss it in detail with a broker. That broker should be able to explain to you the various aspects of the assessment which contribute to the result.

As a general overview, the banks use about 80% of the rental income to cover the holding costs of the property. Beyond this they don't factor in more specific figures for rates and so forth.

They also look at your existing loans at an inflated interest rate on a principal & interest basis. Your existing income will generally be used, but they have specific policies around certain types of income and employment.

Affordability calculators aren't quite as simple as most people believe, and every lender is slightly different as is every borrower.

 

[Evachange]

if you buy an investment property you have to pay rent somewhere so that adds to your expenses.

Unless they are living rent free with family and the LVR is 80% or less, then some lenders don't include the notional rental amount.

Cheers,

 

[corrad]

Well you haven't given enough information to work that out....

In any case, the reason for the discrepancy is probably due to a) an error in the input and b) if you buy an investment property you have to pay rent somewhere so that adds to your expenses.

a) errors in input? this is done using 3 different bank's website calculators. They all only offer about an additional ~200K in borrowing power.

b) I am paying mortgage on my PPOR, thinking of procuring an IP. Just surprised that the borrowing power with the same amount of payment for PPOR and IP are so drastically different. In fact, it's like a 55% discount ($250K/$450K)

 

[corrad]

Don't get too hung up with the banks online calculators. They're a sales tool and for the most part they don't reflect the banks actual policies in which the banks use to determine your borrowing power.

If you want a quick and accurate comparison of your borrowing capacity with various lender you should discuss it in detail with a broker. That broker should be able to explain to you the various aspects of the assessment which contribute to the result.

As a general overview, the banks use about 80% of the rental income to cover the holding costs of the property. Beyond this they don't factor in more specific figures for rates and so forth.

They also look at your existing loans at an inflated interest rate on a principal & interest basis. Your existing income will generally be used, but they have specific policies around certain types of income and employment.

Affordability calculators aren't quite as simple as most people believe, and every lender is slightly different as is every borrower.

I have spoken to a broker, and he ran the scenario through 2 banks, and both came back yielding a borrowing power of about 200K for the IP, on top of the existing mortgage. BTW, the LVR is way under 80%.

 

[Peter_Tersteeg]

I have spoken to a broker, and he ran the scenario through 2 banks, and both came back yielding a borrowing power of about 200K for the IP, on top of the existing mortgage. BTW, the LVR is way under 80%.

Why only two banks? Just about every broker has access to software that will provide a preliminary indication of 20+ lenders all at once. From there they should be able to break it down to a shortlist very quickly for a more detailed analysis.

Did the broker to explain to you how the calculators of those two lenders determines the figures it comes up with? If a broker can't explain this adequately they they clearly don't understand what they're doing.

Lenders policies do vary and this can have a dramatic influence on many things including borrowing capacity. There usually isn't a huge difference between one lender and another if there's only one property in the portfolio, but by property number 3 the difference can be quite dramatic. It's not uncommon for lenders at the top end of the scale to offer 2-3 times more than a lender at the bottom end.

As to why your results are very different between an IP and a PPOR, this might depend on how much you're paying in rent before you purchase a PPOR. It could also mean that the broker forgot to include the anticipated rental income from the new IP. There's no straight answer without a lot more detailed information.

 

[Aaron_C]

a) errors in input? this is done using 3 different bank's website calculators. They all only offer about an additional ~200K in borrowing power.

Borrowing power is a very crude way to calculate things. Like Peter said it depends on your situation.

b) I am paying mortgage on my PPOR, thinking of procuring an IP. Just surprised that the borrowing power with the same amount of payment for PPOR and IP are so drastically different. In fact, it's like a 55% discount ($250K/$450K)

Maybe your broker has run the numbers through a conservative lender without negative gearing or other information?

 

[tobe]

how much is your existing PPOR debt? Some banks use their plug rate, and others the actual rate in their calculations of existing debt, this can change the outcome radically.

Like Pete said, online calculators are just a sales tool. You need a competant person to complete the data entry correctly into the lenders diferent calculator and have them interpret each lenders policies correctly.
There no point inputting total family income for instance. It needs to be broker down into each member, and each sort of income, because of diferent tax rates, and diferent lenders policies about which income they accept, or discount. Same goes for expenses.

 

[Evachange]

Some lenders assessment rate is 7% and other are 8% or more, also things like regular overtime can also have an impact on the amount you can borrow.
For example, some lenders will take regular overtime at 100% and others at 50%.

In some case?s we have had a yearly bonus used as income for servicing.
However some lenders would not take the bonus for servicing as it was only once a year, and some wanted to see it every month.

As others on the forum have said, unless you get someone who can sit with you and complete an assessment it?s hard to say for sure.

The online calculators are often misleading in my experience, and are as others pointed out are a sales tool.

 

[jameso]

Talk to a different broker, there is a great one mentioned a few threads below this one! Your PPOR's LVR will be up to each banks valuer to work out. There was 80k difference from my highest to lowest!