Les
Reply: 1
From: Mike .
Re: LVR LIMITS
From: Les
Date: 11/21/99
Time: 12:37:42 PM
G'day again PLL,
I'll start with your second question, which seems to be asking about DSR (your Debt Servicing Ratio - which lender's need to know before they'll lend you more money).
DSR varies slightly from lender to lender, but a conservative approach would be to do the following:-
Calculate 30% of your combined incomes.
Calculate 75% of rental incomes.
Add these together.
Some lenders may allow slightly higher figures here. That's your Income figure that they deem can be applied to Housing/Investment - NOTE: any Credit Cards, Personal Loans, etc. will be SUBTRACTED from this figure.
Next:- Add together your Outgoings (mortgage interest) - MANY lenders here ADD 2% to the current mortgage Interest Rate (just to allow a buffer, in case of future Int. rate increases). So, you do the same.
Then:- Subtract this last figure from the first figure. In your case there is still a positive result around $5000 - $7000.
Example: If you bought another house like #2, then purchase price is $270,000 + costs of $15,000 gives $285,000. Interest on that at 9% is $25,600, minus 75% of rent ($10,700) leaving $15,000 needed to satisfy this lender.
So, conservatively speaking, a lender would turn you down for another loan at the moment. But go back to Jan's books where she mentions getting YOUR figures documented to present to a lender. Some people live comfortably on HALF of their take-home pay, while others can't exist on ALL of it. Depending on your particular circumstance, you may well be able to get another property or two NOW.
Re your first question, can I first comment that 100% LVR (or more) is a better Tax benefit than 70%. But your main question is "What if Interest Rates soared to (say) 12%?"
The answer is manifold:-
1. It would increase your current outgoings by $26,500 per year. Of that, 48.5% of this new "loss" would be subsided by the Tax Office - but first SUBTRACT the Home Loan portion that is NOT for Investment Property.
2. Rents would likely rise as Landlords started to notice the change.
3. As rents rise, tenants may well decide to go and buy their own property, thus lifting house prices - so your Equity grows.
This is probably one of the reasons why Jan recommends working to get your portfolio's LVR down to around 50% (it leaves a huge buffer for any such changes, as rents exceed Mortgage Interest) - but the flip side is the gearing becomes positive (where you are now, PLL) so the Tax Office is not helping you as much as they might.
A further thought:- I'd mentioned earlier to see a Financial Adviser - I'll change that to "Go see your Accountant first". He's the guy that can tell you in detail where you are right now, and what Tax benefits you have, and could have with some changes. He will also be a "full bottle" on DSR%, LVR%, as well and should be able to assist you in accurately defining the current "state of the PLL nation".
THEN go see a Financial Adviser if you believe you need to -
Regards, Les
