Changes / tightening on servicing for investors

Thanks again euro
Learnt so many new things from ur post
How does adelaide bk via mortgage managers compare with firstmac
or even me bank in terms of assessing its own debt and max borrowings
Given loans.com.au is owned by firstmac, can u do 2mill with both, or just 2mill total between the two
Thanks

ME Banks rates are sharp, but their servicing calc is NOT remotely near the top of the pile. If you must use them, use them early on INV properties only ( you'll see why in a moment) , get what you can from them at 90 - 95% LVR and then move on. Their low rates will assist you later on when it is treated as "actual' by one of the more investor friendly lenders, but their usefulness ends there as far as building a portfolio is concerned. And because of their useless cash out policy, treat that property as set and forget as you wont be drawing equity from it for several years, until it gets well below 80% LVR.

Broadly speaking , the classic scenario I see over and over and over is investors who have started in more recent years, telling me they have 2,3 or 4 properties, have seen good growth and now want to have 6,7,8 investment properties or more, but they have a sizeable non deductible mortgage and just cant understand why they have hit a servicing wall. There's an assumption that equity equates to borrowing power. Worse still, typically these types of scenarios involve clients who are generally obsessed first and foremost with "lowest rate" Now, reading this series of posts about something as simple as the removing of "actuals" by AMP , and the almost panic like reaction by some to that news, only further serves to demonstrate how important ready access to credit is.

So let me begin by addressing rates. Lenders such as ING, ME, Bankwest may have the sharpest rates but they also have ( by quite some distance) the worst calcs, worst cash out policies and are basically guaranteed to snooker you in the fastest possible manner :) In the end it always eventually comes down to a choice ... does the investor (or wannabe investor) want to be stubborn and hold out for miniscule differences in interest rates or brand name , or does that investor want to be able to buy more properties and get the money to do it? There's no right or wrong answer expected - each person needs to take stock of their personal appetites and ambitions, but if you are an investor who has reached or nearly reached your capacity and do want to know how to go beyond what most brokers will tell you is your limit, here is how;

1. you need to have strong equity ( which is quite different to borrowing capacity)
2. you need to be willing to embrace NRAS
3. you need to be willing to embrace Firstmac and Adelaide Bank (via mortgage managers).

If these 3 things arent of interest, then all the normal conventional limitations that have been posted about on here already will continue to apply to you and this post will serve no value. But if you are open to points 1,2 and 3 here are the way to use these lenders as an alternative solution to your capacity wall and continue to grow a portfolio

Firstmac. Potent borrowing capacity if you play it right. You have to be willing to refinance your PPOR to them, before they will allow you to use the NRAS credit. You dont have to cross collateralise, but you do need to have your PPOR with firstmac (not loans.com.au - it has to be firstmac) . If this was a strategy you were to adopt, you would be well advised to take the VIP package at 4.19% with offset and 10 free sub accounts. Each can have its own offset ( which I think you'll find most brokers aren't aware of as firstmac does not promote it, but you can definitely have 10 splits and 10 offsets if you ask hard enough ) and each split can be 10 years I/O. They take 65% of market rent for NRAS deals ( 80% of the NRAS rent, which is 64% of market rent but they round it up) . They take actuals on all other debt ( including their own ) They take neg gearing. And then the game changer - they take 80% of the NRAS annual credit (which just went up to $10,917) but interestingly it is added as untaxed income . The net result of these policies? Well, when you consider how few other lenders apply the big 3 - actuals on other lenders debt, actuals on their own debt AND neg gearing... and then you inject the NRAS credit as tax free income as well, it doesnt take long to realise this policy offers SIGNIFICANTLY superior capacity to the next best servicing calc available.

Please note - the NRAS credit can't be used on loans requiring progress payments, at any LVR. So you need to use Firstmac for NRAS apartments, townhouses, completed houses etc. You do NOT want to use them for NRAS construction loans.

Adelaide Bank only offers its NRAS niche policy via mortgage managers. It was basically a copy cat of Firstmac but they dont require your PPOR and they added two twists. Firstly, is NOT available via Adelaide Bank branded loans. It is only available via mortgage managers who are funded by Adelaides wholesale program. And the other twist? Unlike Firstmac, who do everything except construction loans for NRAS, Adelaide ONLY does house/land/construction deals. ie they do NOT take villas townhouses or apartments as NRAS . They will take single securities ( houses on blocks of land) ONLY. And just to be very clear - when I say house/land/construction deals, I don't mean loans for properties that aren't built yet and require construction, I mean loans for properties where you settle on vacant land first and then the builder specifically requires staged progress payments during the construction period. - that's what lenders consider "construction lending for residential mortgages so that's what I mean when I say construction loans. House/land packages where you pay 10% now and the balance on completion are NOT considered construction deals by a bank. They are no different to Off the Plan purchases. Construction deals are ONLY where progress payments are made during construction.

Adelaide's servicing calc is not quite as good as firstmacs... but it is still quite strong and certainly better than any non NRAS calc ;)

Now some brokers will argue that the reduced rent received from NRAS will curtail your capacity. That would be an example of a half formed argument though. While it's true that the 20% reduced rent has an impact, that is FAR outweighed by the 80% of the NRAS income they give you back on their servicing calc, so those contentions are not accurate. Quick example.. 400K purchase. $400 market rent. Instead of accepting 80% of $400 per week (320) like they would for a non NRAS deal, they accept 65% of $400 per week (260) so they are using exactly $60 per week less for servicing, or @ $3120 less per year. Their calc then applies neg gearing to that figure so it's net impact is actually a touch under $2000. Then they add an additional $8776.80 of tax free income ( 80% of $10,971 NRAS incentive) as compensation. Note I said tax free, so its impact is actually equivalent to @ 12K - ie much higher than the $2K they are stripping out for the NRAS rent reduction. Even a person with limited mathematical skills can see that this allows for a net gain of @ 9-10K , which IMPROVES your borrowing capacity, rather than reducing it. In fact, because of this very very clever policy, with each additional NRAS purchase, your borrowing capacity continues to INCREASE over your previous capacity ... quite an anomaly I know , but true nonetheless... so if you can find 20% deposit each time , you can keep doing 80% NRAS purchases up to an additional to $2 million of exposure. That's enough to get 4,5,6 additional properties that you wouldn't otherwise have been able to

That will in turn deliver you an additional @10K tax free cash flow per dwelling from the after tax NRAS results , so 4 NRAS properties would get you @ 40K tax free, 6 would get you @60K tax free etc... which can then be redeployed onto your PPOR mortgage ( which is with firstmac, remember )... which further IMPROVES your equity position and IMPROVES your borrowing capacity, by aggressively removing non deductible debt -

This in turn allows you to continue to invest AGAIN, as you have created both the equity and the borrowing capacity to do so. The compounding power of the NRAS and Firstmac's ( and Adelaides) calculator is under appreciated or just completely misunderstood , but hopefully this helps readers understand the enormous compounding benefit of this property and finance strategy.

Moral of the story; if you have run out of capacity buying conventionally; if you do not think you will win the lottery ; if you do not want to sell off properties ; if you aren't assured of a huge pay rise, if you still have a good deal of equity available and wish to keep purchasing properties ; if you would like to pay off your non deductible mortgage fast and remove that impediment to continued investing; and most importantly if you do wish to continue investing in spite of all these barriers and limitations - this strategy is one worth seriously considering, because it will get you past those barriers. But you have to be willing to embrace points 1,2 and 3 for it to be of use to you. That fact is categorically non negotiable. Mathematically , what I explained here is accurate, irrefutable and works.
So, in a nutshell this is a high yielding, double tax man backed ( neg gearing and NRAS ) , fully franked dividend reinvestment plan, using property and low rate 30 year residential mortgages to pay off your PPOR mortgage uber fast and build a massively CF+ inv property portfolio where borrowing capacity constraints will never be your problem....

If your broker doesnt understand this- time to find someone new :)
 
Last edited:
  • Like
Reactions: S.T
It's interesting how these changes are made a little after the horse has bolted and the compounding impact of various changes. Looks like the Banks are tightening lending criteria, and Government is tightening foreign investment rules, SMSF lending is becoming harder,and supply is increasing and we are coming close to the bottom of the interest rate cycle. Feels like we are getting close to the market top although interest rates aren't going up anytime soon.
 
Anyone game to take a prediction on when this lender tightening will begin to effect house prices? At the moment the falling interest rates and the fact some lenders are now making policy adjustments, meaning not all of them just yet and some not yet even live.

I have two properties in the process of getting ready for market, one will be 3 weeks but the other is a painful subdivisiom likely about 5 months away.
 
I wonder what % of developers are also property investors. Finance would be harder for investor/developers to get, resulting in less supply, less employment, higher yield, higher serviceability, interest rates will still be low due to sluggish economy and then cycle starts all over again??
 
Anyone game to take a prediction on when this lender tightening will begin to effect house prices? At the moment the falling interest rates and the fact some lenders are now making policy adjustments, meaning not all of them just yet and some not yet even live.

I have two properties in the process of getting ready for market, one will be 3 weeks but the other is a painful subdivisiom likely about 5 months away.

It will affect unit prices more than house prices in my opinion.

Alot of investors are piling into units, and at the same time alot of off the plan developments are in progress.

Unfortunately I think alot of the OTP buyers will find at completion date that they can no longer get finance or they will need a 10% larger deposit to settle. I know prices are going up in some cities, but developers often price in some of the expected CG.

In 6 months we may find a glut of units on the market, with investors no longer lining up to buy due to hitting servicability limits.

Houses on the other hand, are mostly tightly held by owner occupiers, and don't get mass speculative deposit bond purchases.

While it's hard to predict, I expect within 6 months the price growth in units will slow, and next year the boom (sydney/melbourne) will be over. Houses will probably stabilise as owner occupiers tend to hold on if the market slows, but in 2016/2017 unit values may even decline.

I know Dr Andrew Wilson etc shows the whole migrant numbers vs new housing argument, but we will still hit an affordability wall eventually even if demand is high.
 
Thanks again euro.
And especially for explaining in great detail
1) With firstmac, if u have a large ppor debt, does the 2mill max include that as well or is ppor seperate.
If its together then if i have a large ppor debt, there wouldnt b much left for nras properties?

2)with mortgage managers for adelaide bk, do they count their own debt AND ofi debt at actual payments AND count negative gearing

3)firstmac 80% lvr loans. Do they need dua approval

4)firstmac rates seem quite sharp plus their calculators very generous
Any reason they arent more popular with brokers?

5) any good nras house and land in sydney?

Thanks
 
Unfortunately I think alot of the OTP buyers will find at completion date that they can no longer get finance or they will need a 10% larger deposit to settle. I know prices are going up in some cities, but developers often price in some of the expected CG.

Some OTP purchased in 2013-2014 has gone up 100k or so (in Some Area).


In 6 months we may find a glut of units on the market, with investors no longer lining up to buy due to hitting servicability limits.

Depend on the area

Houses on the other hand, are mostly tightly held by owner occupiers, and don't get mass speculative deposit bond purchases.
If interest rate rises significantly, houses will be affected, as the prices has increased WELL Beyond Wages/inflation/rental yield (some are 2% yield), Units yield are still reasonable. Average 4 - 4.5%
 
Some OTP purchased in 2013-2014 has gone up 100k or so (in Some Area).




Depend on the area


If interest rate rises significantly, houses will be affected, as the prices has increased WELL Beyond Wages/inflation/rental yield (some are 2% yield), Units yield are still reasonable. Average 4 - 4.5%

I'm talking about OTP settling after the boom stops,todays sale stock. Of course the 2013 ones have gone up 100k, that was the start of the boom.

Also I must clarify we are not talking about interest rates here. I was answering a question about how lending policy tightening will affect the market.
Lending tightening affects new borrowings most.
But interest rate increases are different and they affect all, for example the housing market as you mentioned.. But that is alot further away. The short term problem is tightening on lending, which in my opinion affects investors more than owner occupiers, and units more than houses. Plus OTP settlement issues..
 
I'm talking about OTP settling after the boom stops,todays sale stock. Of course the 2013 ones have gone up 100k, that was the start of the boom.

Also I must clarify we are not talking about interest rates here. I was answering a question about how lending policy tightening will affect the market.
Lending tightening affects new borrowings most.
But interest rate increases are different and they affect all, for example the housing market as you mentioned.. But that is alot further away. The short term problem is tightening on lending, which in my opinion affects investors more than owner occupiers, and units more than houses. Plus OTP settlement issues..

Perhaps ur right... But i'm sure there will always be bank/lenders that are willing lend you 90%, you just have to pay LMI.
 
Thanks again euro.
And especially for explaining in great detail
1) With firstmac, if u have a large ppor debt, does the 2mill max include that as well ?

YES

If its together then if i have a large ppor debt, there wouldnt b much left for nras properties?

I'm not sure I see what you're getting at??? ..... If there's enough capacity to get just 1 extra property, that's still 1 more property than you can get using any other lender. And you can also use Adelaide Bank for an additional $2 million remember? Only firstmac limits you to $2 million inclusive of your PPOR. Adelaide leaves you with a completely separate $2 million. You're just limited to house/land deals to use them.

And remember the compounding effect of each extra NRAS purchases. Each NRAS property also generates @10K of tax free cash flow after all expenses , which if redeployed towards aggressive debt reduction will help you into an even greater number of INV properties you wouldn't otherwise have ever been able to borrow for, far sooner. Put simply, look at NRAS as a compounding accelerant, and look at the firstmac and adelaide's products as enablers of that accelerant.

2)with mortgage managers for adelaide bk, do they count their own debt AND ofi debt at actual payments AND count negative gearing. To be completely honest I just havent looked at their calc in quite some time... havent had any need to. so I cant answer you with 100% confidence . One of the other brokers who uses them may be better able to answer that .

3)firstmac 80% lvr loans. Do they need dua approval They used to, as they are a securitised lender but for @ 2 years now, they have not required it for non construction loans below 80%. They require LMI sign off on construction loans at any LVR - which is precisely why the NRAS tax credit cant be used for construction deals with Firstmac. Neither Genworth nor QBE allow it.

4)firstmac rates seem quite sharp plus their calculators very generous
Any reason they arent more popular with brokers?

Yes their rates have always been sharp. Right throughout the GFC they were sharp as well, in spite of another great urban myth that non banks are somehow inferior and unsafe. Ultimately, they have a low brand recognition, and if you want me to be brutally honest, their big push into 3rd party broker channel after buying the HSBC book in 2006/7 was ineffective because most brokers are order takers and will go for the path of least resistance just about every time. Its not until they need to consider firstmac for reasons such as 10 years I/O or NRAS or borrowing capacity, that they even bother to familiarise themselves with the products or policies. Same goes for most non banks. Most brokers wouldnt have ever used them, or barely ever used them to write a deal... And while I know my comments may upset many brokers , how else does one explain why more than 70% of all mortgage broker generated loans go to the majors?????? That's understandable when most brokers deal with clients who only ever do 1 or 2 or 3 transactions... but it helps explain why so many investors believe they have run out of puff well before they really do actually run out of puff .

5) any good nras house and land in sydney?

NO. No bad house and land in Sydney either. But I do have other Sydney stock.

Now at this stage let me just say - if you want more work done, more questions answered or more scenarios dissected , engage a broker from here (who unlike most brokers, tend to know a bit about not getting you snookered, because they work with investors moreso than others do) or engage me :) That's all the free stuff I'm sharing for today
 
Last edited:
Awesome posts Euro. I'm going to refresh my firstmac accreditation this week.

In regards to brokers / me using lesser know lenders the problem I have is evey lender does things differently and using a new lender can be duanting because it takes time to get a handle on their quirks. The last thing we want to do is let our clients down by not knowing a lenders processing quirks. You are 100% correct though about not letting that get in an investor way. Note to self.
 
That's an amazing post Euro.

The reason most brokers haven't worked with FirstMac is because there's been little done by FirstMac to engage brokers. I could certainly be wrong, but my perception is that they expect that with cheap rates the brokers should come to them. Perception is everything unfortunately. If brokers don't understand what they're offering, how can brokers be expected to talk to them?

The other concern is that FirstMac are a fully securetised lender. During the GFC many other lenders in this category were getting into significant trouble. It wasn't an urban myth that non banks were risky, there was plenty of evidence to support it. To this day, most brokers with a memory of the GFC are reluctant to engage lenders without balance sheet funding.

I do also use Adelaide Bank directly and via mortgage managers. I also need to chase up FirstMac, I think your post and strategy has a lot of merit.
 
Euro, brilliant stuff. Very useful info there.

From a business standpoint, if they want to smash through walls in the third party channel they've got the product offering to match. Particularly in a climate where some of their niche competitors (actual repayment lenders) are moving elsewhere. Personally i think they've got to work on their brand recognition with brokers (haha or just hire you back, you've just converted two of SS best!).

I say that because brokers read on industry news on a daily basis - unfortunately much of that news doesn't really have much good to say about them. There's a large bias in the news delivery, and i'd guess the success of loans.com.au and relatively transparent connection with FirstMac has likely caused some neglect of their position in the marketplace.

Out of interest for others, I threw a relatively complex scenario at them a while ago and they were willing to play ball - opened up a funding line for a client with a very deep portfolio ($5m in debt, 250k+ rental income, average salaries, maxed out at NAB, all majors, Macquarie, AMP, most others, very few places to go).

They came back with the following:

In terms of rental reliance we do not have a set policy and this is instead on a case by case basis. As long as the remainder of the deal is strong then we should be able to look at a rent reliant application however may only be able to use 70% of the rental income for servicing.

Not perfect, but a pretty good response and workable.

For investors looking to stretch their portfolio out without many funding lines to turn to, FirstMac's policy suite seem pretty good. Another relatively useful area (and most don't do) is no genuine savings requirement up till 90 (for O/O). Particularly useful for younger clients getting gifts for mum/dads and still wanting LMI.

Regarding an earlier post of yours, I could be misinformed, but i also believe that ME have an actual repayment policy too, making their serviceability theoretically pretty good - although from a practical perspective, their a bit more hit and miss on the rent reliance issue. Brokers like predictability before submitting applications, particularly for serious investors. Given many's past experience with their practical assessment, not so good on the predictability front. Have heard some real shockers from them. Theoretically speaking though, their pretty good (actuals, debt apportionment, small loading for rent, genworth cash out, etc).

Cheers,
Redom
 
Last edited:
Winter is definitely coming for those who have been doing equity releases up to 90%, IO and rather tight servicing (heaps of those in the past 12-18 months).

Decent opportunity for those who are cashed up and have decent servicing.

Can you explain a bit more please?

I'm just starting on the journey, and was planning to - in the next 2-3 weeks buy a 400k property IO, 90% LVR, renovate, revalue back up to 90% after a year or so, and loop again.

Given the changes in lending, is this now a bad plan?
Or is it possibly a good plan if doing it really soon, but then turns bad later perhaps?

Gulp!?
 
Equity releases above 80% is likely to be something that comes under the microscope in the foreseeable future. I've no doubt people will be able to buy IPs at 90% LVR, but releasing equity may get more difficult.

It will probably still be available, but under more limited circumstances. We won't really anything until it actually happens.
 
I hope they don't touch the policy where you can revalue OTP at the current market value after 12 months of signing the contract on settlement.
 
Can you explain a bit more please?

I'm just starting on the journey, and was planning to - in the next 2-3 weeks buy a 400k property IO, 90% LVR, renovate, revalue back up to 90% after a year or so, and loop again.

Given the changes in lending, is this now a bad plan?
Or is it possibly a good plan if doing it really soon, but then turns bad later perhaps?

Gulp!?

Its not black and white and there is no textbook as to how lenders are going to treat this. It will be very difficult to do equity releases up to 90% - this will come by way of:

1. Credit scoring - straight out decline based on how each lender has tightened their credit scoring

2. Credit will come back with a "only provide the cash out once the client has found a property" (which most are doing now anyway)

3. Credit may say happy for 90% cash out but customer needs to revert to P&I

4. Credit may say no IO on PPOR debt

OR a combination of all of the above.

Bottom line is that its a moving target and you need to hope that the broker and banker is on their game.

Comes back to the saying that pull out the money/equity when you can and don't leave it for later.
 
2)with mortgage managers for adelaide bk, do they count their own debt AND ofi debt at actual payments AND count negative gearing. To be completely honest I just havent looked at their calc in quite some time... havent had any need to. so I cant answer you with 100% confidence . One of the other brokers who uses them may be better able to answer that .

havn't had time to read the full thread...but ill answer some of euro's post quickly...
^ ABL is very very decent for servicing esp in the NRAS space...as they DO take th 10k tax credit for existing stock and on a case by case basis....the only disadvantage is they dont do apartments...only house....

They have their own funding so no need for a DUA at 80%


4)firstmac rates seem quite sharp plus their calculators very generous
Any reason they arent more popular with brokers?

Can't speak on behalf of other brokers but my office uses Firstmac for most of of our NRAS deals....at the peak of the NRAS "frenzy" 12-18 month ago....we were placing close to 1 NRAS deal a week to firstmac....these days it's more 1-2 a quarter....

Pro
- Sharp rate ..esp for the lower price ranged property, which is typically for a lot of NRAS
- They do take 10k tax credit ( Case by case...but in most siutation it's ok)
- Decent servicing
- Own DUA funding at 80% ( This changed 12 month ago)
- Can discount rate if you refinance a 2nd loan ( they did take this" dual application product" off the market 1 year ago...but in the background if you ask you will receive :)
- Accepts unit and houses



Con
- Dont do refinance of NRAs ( Which is common with a few lenders....but having said that still a handful that will)
- Slow...
- NRAS construction is priced higher and need LMI approval....also best target LVR is 70% for this construction with Firstmac
- Limited up front val ( not impossible...but they do ask a lot of questions + charge the client so it's not free)
 
Back
Top