Finance

[WebBoard]

From: Mike .


Big cashflow having problems raising finance
From: Reddy
Date: 14 Feb 2001
Time: 00:33:11

Great site ! I have enjoyed reading the posts and given the enormous amount of wisdom that seems to be floating around feel that this forum could contain some answers to a rather frustrating problem.

I am 27 years old, born and raised in Sydney and have been working in New York for the last 4 years. After all expenses, taxes and outgoings, I can save AUD$30,000 per month. Given the job I am in then all going well I could be saving AUD$50,000 per month in 2 years. I have no personal debts, don't overspend on luxuries and believe I have a very good saving record. 7 months ago I "discovered" that wealth creation through property is alot easier, less stressful and certainly more fun. I have therefore been using cash savings to put deposits on a number of units in Sydney with a 70-80% leverage.

Here is my frustration. I would like to get 90% interest only loan from a lender for loans ranging from AUD$250,000 to AUD$325,000 - but after approaching most of the financial institutions have been rejected. The best I can get is 80% interest only ! The reasons vary from a pathetic "its the bank's policy that the borrower has to be in Australia" to "it may be difficult for the bank to serve notice on you if you are in default".

I just fail to see how I am a risk factor. Sure bank policy is flexible? I have never defaulted on any debt and as I said have a good savings record. I don't want to use 70 -80% leverage if 90% is available. I would greatly appreciate if anyone has any similar experiences, or knows of a bank manager/financial institution who would be willing to consider my case and be flexible. Thanks

 

[WebBoard]

Sim

Reply: 1
From: Mike .


Re: Big cashflow having problems raising finance
From: Sim'
Date: 14 Feb 2001
Time: 07:12:10

Hmm... you used 'bank' and 'flexible' in the same sentence. I don't think you are allowed to do that ;-)

Hopefully some of the mortgage brokers on the forum can make some suggestions ?

Sim'

 

[WebBoard]

Mike

Reply: 1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Mike
Date: 15 Feb 2001
Time: 17:15:53

Hi Reddy,

You've confused me with your terminology.

Are you saying that you want to borrow 90% of the purchase price, which means you pay the other 10% plus costs? If yes, why not borrow 100% + costs?

Or are you after a Loan to Value Ratio (LVR) of 90%? Since LVR's above 80% don't exist, I assume the above is the case.

The reason I bring the LVR into the discussion is because I am relocating to London later this year and enquired through my mortgage broker whether the servicability formula used by my lender would change.

This was his response:

Michael

Income situation is no issue. Bank will still use accepted Australian formulas however loan to valuation ratios change ie maximum lent is between 60-70% of value of properties.

Me again: So you see, Reddy, their attitude of me as a greater risk is shown by them dropping the LVR well below 80%.

I see two possible reasons:

The lender may not be able to garnishee your wages while you are OS, should you default on the loan.

Secondly, you cannot convince the lender that you will stay in New York, on that income, for the term of the loan. What happens to your income if you return to Oz as your property investments here suggest you will?

Now, if you're saying that banks require a cash deposit of 20% instead of using available equity from other property, then I have to seriously reconsider going to London. As it is, the LVR will drop, I'll be losing the tax benefits of negative gearing and the cashflow benefit of 221D.

If what you say is true, then how can higher wages in London possibly compensate for being completely stuffed with regard to buying further IP's in Oz?

HELP!!!

Regards, Mike

 

[WebBoard]

LB

Reply: 1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: LB - Mike
Date: 16 Feb 2001
Time: 08:15:56

Hi Mike, The LVR is set at 80% in case of a fire sale caused by default. The question being Why does the potential value (fire sale value of the property) go down from 80 % to 70% due to where the borrower lives? It should be as easy to foreclose and have a mortgagee sale not matter where the borrower lives? This sounds like the Banks usual bag of tricks to get as much security as possible. I would think that with multiple properties and a Big Cashflow you would be in a position to FORCE them to re-consider. LB

 

[WebBoard]

Reddy

Reply: 1.1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Reddy
Date: 15 Feb 2001
Time: 21:21:55

Mike, sorry for the confusion in my note. My request is for a lending institution to lend 90% of the purchase price - and not a loan based on a 80-90% LVR.

Yes, in the future (when the cash reserves go down for whatever reason) I will use the increased equity in each of my properties as the down payment for the acquisition. I am told by my bankers that using the increased equity to fund purchases of subsequent property is still an alternative available to non-residents - so no need to derail your your London plans. In fact, two of properties were purchased in this way, when I first arrived in NY. However for the time being, I have surplus cash and don't mind using this cash as the downpayment - but I very much prefer to have cash downpayment limited to 10% of the purchase price.

Your reasons for the lenders disallowing the 90% finance are fair - and in fact such reasons have been quoted to me by two of the majors. However, I believe I can present a decent case to a bank manager willing to listen (thus far I haven't found anyone, although Rolf seems to be up for the challenge of helping me find someone - thxs )

Enjoy london. Reddy

PS - are you going to London on a london local package? Or are you going as an australian expatriate package tax equalised back to Australia? ... the choice is going to affect your cashflow.

 

[WebBoard]

Mike

Reply: 1.1.1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Mike to Reddy
Date: 16 Feb 2001
Time: 08:32:41

Hi Reddy,

I think I follow you now. By using a cash deposit you want the IP to be self-secured. I wonder if the 90% figure could be achieved with a principal and interest loan? The repayments would be higher, but you would be turning your cash into equity.

Also, you said: "PS - are you going to London on a london local package? Or are you going as an australian expatriate package tax equalised back to Australia? ... the choice is going to affect your cashflow."

I'm afraid I'm clueless with your jargon so could you explain the difference and the effect to cashflow?

Regards, Mike

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Rolf
Date: 14 Feb 2001
Time: 14:45:40

Hi Reddy

Wish I had your problem !

Being offshore for the last four years are you considered as a non-resident for tax purposes ?

Non resident loans offered are usually around the 80 LVR even and they like you to be self servicing as well.

A lot depends on how much volume of lending you have and whether you are willing to move that.

Generally I would say your problem has more to do with Lenders Mortgage Insurers rather than the lender themselves.

On another point, we have recently read about the huge gains and opps. in US property - could you comment please ?

Ta - Rolf

[email protected]

 

[WebBoard]

Reddy

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Reddy
Date: 15 Feb 2001
Time: 11:48:25

Thanks for the reply. Yes, per professional tax advice, I am treated as a non resident for australian tax purposes. I was told that insurers may have a problem insuring the banks for these loans .. . but isn't the risk to the financial institution of carrying an extra 10% of the loan amount justified in light of my savings record, income levels and high servicing capacity (loan amount will be between say AUD250K and AUD$300K)?

If a lending institution was prepared to give me the 90% interest only, I would not only move all my current loans to that institution but would also spread the news to the OZ expatriate community in NY and London (who prefer the oz to the US prop market .. and are seriously cashed up). From some of the emails below, it appears that preparing a formal proposal may help - great idea if and when I find the time. Rolf, if you can help in anyway, would be most grateful.

Thanks

P.S - Yes, property prices have shot up in all parts of the US, particularly in Manhattan where I live. However, I along with most of the other ozzies up here, much prefer the property market in the Australian state we grew up in.

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Rolf
Date: 15 Feb 2001
Time: 18:18:30

Hi Reddy

You are implying that lending institutions as a generality apply logic to their credit policy program. Some do, but only if pressured.

The major problem is that you are a non-resident (alien in US speak) and are therefore considered a greater actuarial risk than a local body. To the insurers it does not matter about your excellent income, savings record etc, they only look at the stats.

However, lenders do make significant policy bends on a case by case basis. We manage to get policy exceptions through sufficiently to make it worthwhile. Also, there is more than one way to skin the cat as that horrible cliche goes.

Although the world is a small place I know that expatriate postings can make some things much more diff. - I worked in Jakarta for a while.

I am certainly willing to give this a punt.

Talk to me off air on [email protected]

Ta - Rolf

 

[WebBoard]

Reddy

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: Big cashflow having problems raising finance
From: Reddy
Date: 15 Feb 2001
Time: 21:28:25

Thanks Rolf for looking into this. I drop you a note off line

regards, Reddy