Heard this many times yet not so sure how it can happen if all the IP is cashflow positive. Is this something that only happen in neg gearing investment? Let's have an average joe and jane scenario where they both earn average income. Can the gurus give me an example please and how to avoid this thing?
hitting the serviceability wall
- Thread starter bonanzawealth
- Start date
With the buffers the lenders put on loan repayments and rents received the investments need to be very positive which in reality it's almost impossible across a young portfolio. To avoid the wall it's best to use middle of the road servicing lenders first and keep the generous ones (usually those that service other banks loans at actual repayments) till the end. Often time is also required so income and rents increase.
No, it can happen with positive cashflow too.
The problem is that lenders add a loading onto the loan you're applying for, and some add loading onto the debt you currently hold as well. Many lenders will take repayments at P&I even if they're IO just to twist the screw a little tighter.
Add to that, they mostly only take 80% of your rental income, too.
It's weighted against you.
But you're right in that having an IP with good cashflow will help you keep buying longer, as will using the right lender at the right stage of your buying.
The problem is that lenders add a loading onto the loan you're applying for, and some add loading onto the debt you currently hold as well. Many lenders will take repayments at P&I even if they're IO just to twist the screw a little tighter.
Add to that, they mostly only take 80% of your rental income, too.
It's weighted against you.
But you're right in that having an IP with good cashflow will help you keep buying longer, as will using the right lender at the right stage of your buying.
Lenders also factor in an allowance for interest rates to increase when determining your affordability. As a result, what's positively geared for you, probably won't be positively geared from the banks perspective. You can hit a serviceability wall with the banks even if you are positive cash flow.
From the lenders perspective, the exact figures vary from one lender to another, but as a basic rule, assume you need about 3% higher than current rates just to 'break even' on serviceability. If rates start to increase, this margin will probably go up too.
This is a rule of thumb, you shouldn't entirely rely on it, get proper advice from a broker or lender.
From the lenders perspective, the exact figures vary from one lender to another, but as a basic rule, assume you need about 3% higher than current rates just to 'break even' on serviceability. If rates start to increase, this margin will probably go up too.
This is a rule of thumb, you shouldn't entirely rely on it, get proper advice from a broker or lender.
Is this still the case even after APRA notified banks about changes to lending practices back in Dec last year?
Yes still the case
Pretty much - but it's a balancing act as well. You don't want to end up stuck with those least generous lenders too early either.
There really is no perfect solution/method - the ideal approach to avoid hitting a servicing wall varies so much between clients.
Cheers
Jamie
Heya,
Can hit a serviceability wall, particularly if you're purchasing at low yields (but this is only one factor). Interest rates play a large bearing on an investors ability to grow a large portfolio. With rates as low as they are today it does make it easier.
Good loan structuring and switching lenders can definitely stretch the wall out though. I posted some general finance guidelines a little while ago that may be of interest: http://somersoft.com/forums/showthread.php?p=1282698#post1282698
Cheers,
Redom
Can hit a serviceability wall, particularly if you're purchasing at low yields (but this is only one factor). Interest rates play a large bearing on an investors ability to grow a large portfolio. With rates as low as they are today it does make it easier.
Good loan structuring and switching lenders can definitely stretch the wall out though. I posted some general finance guidelines a little while ago that may be of interest: http://somersoft.com/forums/showthread.php?p=1282698#post1282698
Cheers,
Redom
