Debt-Serviciability-ratio

[Anonymous]

From: Anonymous


Hello,

I'm new to this site however I have been investing in property for four years. My problem is borrowing more money to obtain more properties. My first buy was a house in the Mount Druitt area in Sydney, it was cheap fibro type house which yielded a positive cashflow in two years. My second buy was a studio apartment in Paddington which is still negatively geared.

I was wondering on what criteria do banks use to assess you debt-serviceability-ratio. I am currently on a teacher's salary and on the look out for positive-cashflow properties. What percentage do the banks consider of your rental income so that they will "cancel out" your mortgage repayments?

Does anyone here work in the banking industry or know the answer how to get around this problem?

Thanks.

Sophie.

 

[Rolf Latham]

Reply: 1
From: Rolf Latham


Hi Sophie

You have hit ( or will hit) the normal snag of not enough cashflow to service liabilites.

There is no set formula. Lenders have very different models for calculating what is an acceptable cash flow surplus.

It is also not easy to say lender a or b is best because it does really depend on other issues around the borrower - like how many kids, cars, houses, cats, dogs you have.

Lets say you have a 200 k house that you have borrowed 180 k on. The average variable interest rate is around 6.1 %. Your weekly interest only repay will therefore be $ 211 per week.

The average lender assesses rent at 75 % (some as low as 65 some as high as 100%) of actual, so now we are 1.33 x 211 = $ 280 per week.

However, the average buffer on the interest rate is 1.5 %, so our "serviceability" repayment is calculated on 7.6 % not the actual 6.1, so this is $ 263 dont forget to allow for the 75 % rental allowance so 1.33 X 263 is $ 350. So your 200 place requires a minimum of 350 rent per week to float.

On top of that, once your rental income exceeds 25 % to 50 % of your total income some Lenders Mortgage Insurers will look harder at the deal.

To be safe and take into account most lenders peculiarities etc, I would suggest you need 12 to 15 % gross income to be "serviceability" neutral based on a 90 % Interest Only lend

Take heart though, there are teachers with IP liabilities well exceeding 1 million, its a matter of using the right lenders that suit your scenario mix.

Ta


Rolf

 

[WebBoard]

Reply: 2
From: Brett Burt


How about 'developing' your own property - get in for $75,000 take $20 to
30,000 cash out and buy one of the developments discounted as a member of
the development trust. This will help get around cash flow problems that
most investors eventually hit.

This is an alternative strategy which many investors do not consider.
I can be contacted on 02 43690888 Developers Club Trust No 1. Brett
----- Original Message -----
From: "propertyforum Listmanager" <[email protected]>
To: <Recipients of 'propertyforum' suppressed>
Sent: Monday, October 15, 2001 9:42 PM
Subject: Debt-Serviciability-ratio


> From: "Sophie Halasz" <[email protected]>
>
> Hello,
>
> I'm new to this site however I have been investing in property for four
years. My problem is borrowing more money to obtain more properties. My
first buy was a house in the Mount Druitt area in Sydney, it was cheap fibro
type house which yielded a positive cashflow in two years. My second buy was
a studio apartment in Paddington which is still negatively geared.
>
> I was wondering on what criteria do banks use to assess you
debt-serviceability-ratio. I am currently on a teacher's salary and on the
look out for positive-cashflow properties. What percentage do the banks
consider of your rental income so that they will "cancel out" your mortgage
repayments?
>
> Does anyone here work in the banking industry or know the answer how to
get around this problem?
>
> Thanks.
>
> Sophie.
>
>
>
> To reply: mailto[email protected]
> To start a new topic: mailto[email protected]
> To login: http://bne003w.webcentral.com.au:80/~wb013
>

 

[Anonymous]

Reply: 2.1
From: Anonymous


Thank you very much for this information. I am currently looking through all the information on this site (and similar Australian sites like:
http://www.creativerealestateinvesting.com.au/default.htm

http://www.real-estate-online.com/art_menu.htm


It's really useful to know what the banks use to assess your serviceability.

One more thing Rolf: What do you mean by 12% - 15% gross income. What is that calculated off? I understand the rest of what you've written.


Thanks.

Sophie.

 

[Rolf Latham]

Reply: 2.1.1
From: Rolf Latham


Hi again

essentially 12 to 15 % gross rental return as a function of sales price.

So 200 k house, you want 460 + a week in rent. AS you can see this is not easy to do, especially in the Sydney Market.

Ta

Rolf

 

[Anonymous]

Reply: 2.1.1.1
From: Anonymous


Rolf,

Thank you for working out the figures for me. However I have another question.

The figures you originally worked out come to a 9% gross income which would give you a $0.00 yield (taking into account 75% rent and 1.5% extra interest rate). You said to be safe you should consider 12-15% gross income. This is considerably more than 9%. I am making more than 9% so my question is, if you have enough equity to cover 20% deposit, is 9% good enough? Which means that as long as you have 20% deposit and are producing a 9% yield (by 75% rent and 1.5% above interest rate) you can keep borrowing ad infinitum.

Surely this cannot be the case but is there a way of doing this?

Thanks.

Sophie.

 

[WebBoard]

Reply: 2.1.1.1.1
From: W W


Rolf

Going on from what Sophie said, I have found some properties that give about 15% yield. If I was able to come up with 10 or 20% deposit per property, could I go on borrowing forever? I was planning to use low doc loans when I hit 'the wall', but need at least 24% deposit and the interest rate is much higher.

Thanks for you help.

WW