How is your Rental Income treated ??

From: Les .



G'day all,

I've heard others mention this, but today got hit with it myself.

Question:
When applying for another loan, is your current rental income treated as Income, or offset against mortgages. I can tell you now it can make a HUGE difference to your loan application.

Why? Well, simply put, if it's treated as Income, then the amount that is offset against your outgoings (mortgages) will be equal to the DSR level that your lender will let you have - usually 30% to 40%. So you'd better have HUGE positive gearing if you want to get a loan, or HUGE equity to make the difference.

I know that some lenders will allow (say) 75% of Rental Income to be offset directly against mortgage payments - a helluva lot better than 30 - 40% !!!!! I'm about to go search the archives to find the post that can tell me which lender I should be going to.

In my case, with rent as income, the DSR shows as 40% - but if rent is offset (at 75%) the DSR plunges to 25% - the latter wins, the former does not !!

If I find the archived post (with lender's name) I'll post the details. But the question is, how is YOUR lender calculating YOUR situation? Are they holding you back unnecessarily??

And if it's not too much of a problem for you now, how will it be when you own 20 IP's, and only 30% of rent is allowed to offset the mortgages? Would THAT stunt your growth??

The way some lenders think, we must start eating more with each IP we purchase !! (hate to think how I'll look when I own 10 !!)

Food for thought ... ;^)

Regards

Les
 
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Reply: 1
From: Duncan M


The NAB allow us 100%
Commonwealth allow us 70%

Regards,

Duncan.
 
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Reply: 1.1
From: D R


Hi There,

I am with the NAB.

Last time I bought it was 80% for something with existing tenants and 60% with something that was brand new and had no tenants yet....


DR
 
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Reply: 1.1.1
From: GoAnna !


Les

I think you have made an important point which I did not appreciate until my last loan application. However I think that the two replies so far have missed the point. As you are saying it is not the percentage that is totally important it is the way in which the bank labels the rent. If it is seen as general income and only 35% (of the 80% rent) is allowable to calculate loan repayments then you won't be able to accumulate many properties unless they are hugely positively geared.

The CBA offsets the 70% against costs which is far preferable to the 80% available at many other banks.

Example

Banks A

Takes 80% of rent as general income. Please assume that property is positively geared by 3k per year.
60k rent x 80% = 48K
50k salary
Total income = 98k x 35% = 34.3K
This bank will not allow the TOTAL loan repayments to exceed $34,300 per year which at 6% is 572k borrowings.

Bank B

Offsets rents against expenses of property.
Property is positively geared.
Interest payments 60K less 70% rent (90k x 70% = 63K ) = 3k positive.

50K salary + 3k = 53K
53K x 35% = 18.55K
This bank will allow 60k plus 18.55k = 78.55K loan repayments per annum which at 6% is around 1.3mil.

Please correct me if my numbers are wrong but I am using them purely to demonstrate the point which I think is crucial.

Anna
 
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Reply: 1.1.1.1
From: Pierre .


Les,

This is a point I made in one of my very first posts on the old forum. I dare say not too many people picked up on what I was saying, but you have just found out how important it is to find a lender - or negotiate with a lender to reduce committment rater than add to income.

I tried to discuss this with my NAB banker a couple of weeks back, but couldn't quite get through to her. I see another trip to her office with my trusty whiteboard and whiteboard marker to explain it in detail.

Anyway, interesting to see the CBA giving a 70% reduction from committment. If you do the sums, comparing the NAB adding 100% of rent to income compared to CBA deducting 70% of rent from committment, you will see that after adding just a few properties, you run into DSR problems with the lender who adds rent to income.

Have a look at the attached file for a simplified demo of this.

I have assumed salary = $60000. Each IP costs $10000 p/a in repayments and recieves $10000 p/a in rent.
(For the sake of the model, I have ignored all other factors such as depreciation, tax, costs etc. Please just accept this model for what it is - simply a demonstration of the point ...)



 
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Reply: 1.1.1.1.1
From: Duncan M


When I say the NAB allows us 100% I mean they take 35% of our PAYE income and 100% of our rental income in deriving a figure that they are happy for us to use in servicing debt.

The concept of reducing commitment and allowing a percentage of rent to be used in servicing debt are identical.

Duncan.
 
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Reply: 1.1.1.1.1.1
From: Donna Larcos


I'm with NAB and that's what happens for
me. Though my banker said they give you
100% of rent of existing properties and
60% of the new one which probably gives
them some cover. The 35% of PAYE is a
bit of a furphy. I have a friend with the NAB
also and he has talked them up to 50% of
PAYE. There is some economic
discrimination otherwise
(economicacist??) . It would assume that
the more you earn the more your lifestyle
expands to accommodate your increased
income. He explained to them that
patently this is absurd. If an "average"
family of four can survive on 35% of the
average breadwinner's wage, say
$40,000, then someone earning a salary
of $1,000,000 is hardly going to have
trouble managing to pay their light bill on
only $650,000 (after they've allocated
$350,000 to their loan repayments).
Therefore, if they would loan on 35% of
the average wage this should rise
incrementally the more you earn
because they have already established
that, in their experience, people should
be able to manage to pay their expenses
on 65% of the average wage. Try running
that by them. What you spend your
money on after this is your business.
 
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Reply: 2
From: Rolf Latham


Les

Get yourself a savy, independent broker. They can show you all the different models used by various lenders.

Many lenders now use cashflow based service models rather than the old DSR, this means previously tight wads are now "throwing" money at you.

As you can see from many posts the rules are also different for everyone, especially when getting close to the "envelope". AT that level policies go out the door, and everything is assessed on a case by case basis.

Regards

Rolf
 
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Reply: 2.1
From: Mike .


Hi Rolf,

You said: "Many lenders now use cashflow based service models rather than the old DSR, this means previously tight wads are now "throwing" money at you."

For my recent acquisition, my borrowing capacity was determined using the new cashflow method. If you can spare the time, could you provide an example of this 'cashflow' model in comparison to the old DSR formula for us to see how much more generous the borrowing capacity is. If it is that good we should all know about it so that we do loans only with lenders who offer it.

Regards, Mike
 
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Reply: 2.1.1
From: M D


Hi Mike,

I know this is an old thread but your above post stated that you went through a lender who used the new cash flow method and I am interested to know which lender it is? We have been to several of the big banks and most of the lending managers there were useless when it came to calculating the DSR criteria. Some knew only to punch figures into their pcs and came up with a certain amt.

Les, have you found any updated info about the different lending criteria?

Regards,
May
 
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Reply: 2.1.1.1
From: Mike .


Hi May,

I need to consult with my Mortgage Broker first to get the whole story. I don't want to name my lender unless I'm sure of my facts. I'll get back to you.

Regards, Mike
 
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Reply: 2.1.1.2
From: Rolf Latham


Hi May

Same answer as last time I suppose - get with a good independant broker, they can show you the 20 or so models used by the various lenders - some will even take tax benefits of interest into account

Ta


Rolf
 
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Reply: 2.1.1.1.1
From: Mike .


Hi May,

The following e-mail correspondance with my mortgage broker might clarify some issues for you. On the otherhand, it may confuse you even further. I hope you can follow it.

My Question to my mortgage broker:


How are you? Could you help me with something. I've been reading a book and at one point it describes a lending criterion: For example, the loan payments may be prohibited from exceeding about 30% of the investor's gross income (less any existing mortgage payments), added to about 80% of the rental income. From the interest rate and other terms, the maximum loan that can be supported by this income can be calculated.

I understand this was the traditional method of calculating borrowing capacity. A few questions: Is it true that some lenders add the net rent to other income and then apply the 30% to the lot which gives you less borrowing capacity? I also read recently that "many lenders now use cashflow based service models rather than the old DSR, this means previously tight wads are now "throwing" money at you."

What does DSR mean? What is meant by "cashflow based service model"? What system did the ANZ apply to me? As I understood our first meeting you included all outgoings including personal expenses to arrive at a net income figure. I presumed the ANZ didn't apply a fixed figure because some people's savings habits are better than others or they might be on a higher income than the average person. Can you clarify this for me and explain why the ANZ's new system is better than the first, traditional model? Also, what model are the other major banks using now?

Thanks in advance. Still trying to educate myself.

Mike


My mortgage broker's reply:

Hi Mike,

The answer to your question is not straight forward however, I will try.

Very few lenders use the 30%Debt Service Ratio(dsr)now & there a few reasons for this. Most lenders use cashflow based models & no two are the same, which makes it sometimes a lengthy process to find the right lender.

ANZ model is especially generous for single(1) applicant as living expenses are low. They are not generous with rental income as only 75% of rent is included as income.

Some use 80%, 90% & 100%

Some add rent to the salary & deduct expenses from that figure & some deduct rent from the total commitments leaving a figure that should be about 30% to 40% of gross salary, this increases borrowing capacity further.

Some lenders will calculate interest on investment loans & allow for tax deductions thereby increasing borrowing capacity by a large amount.

ANZ uses a cashflow model that has set expenses for each type of applicant eg: a couple, plus dependants, a single applicant etc.When assessing seviceability the bank uses their figure if it is higher than yours or your figure if it is higher than theirs.

There are some lenders who use both models & this is handy for applicants with a large family(which reduces borrowing capacity dramatically). DSR does not take into account any dependants, although a net surplus after all expenses is calculated & if it is not high enough the loan be declined even though the dsr is within limits.

Simple, isn't it?

Regards,
 
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Reply: 2.1.1.1.1.1
From: GoAnna !


Thanks for those details Mike. It makes me feel more positive about my future lending applications.


GoAnna !
(aka Anna before she got real)
 
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Reply: 2.1.1.1.1.2
From: M D


Hi Mike,

Thanks very much for getting back to me. Your info was great! At least now I'll be able to ask better questions when I go shopping for suitable finance.

Regards,
May
 
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Reply: 2.1.1.1.1.2.1
From: Marina. L


I am with the Nab bank and this is how my dsr is calculated. (Its so simple)

All Gross income- 100% rent, dividends, wages, anything you can possibly imagine

You divide this by 12 months.

Eg. figure.$9483 per month Gross Income

Now you need to calculate your total committments.

Eg. Total of your loans.(My lender does not put in the Credit cards at all)Thank goodness

Eg figure. $600k in loans

You multiply the $600K by the interest rate you are paying.

Eg. figure $600K @ 7.76% divided by 365 days @ 31days (how many days in that particular month)
This figure comes to $3954

Then $3954 divided by 9483= 41% DSR.

I find this is a really simple method to use.





MARINA

This is arial
 
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Reply: 2.1.1.1.1.2.1.1
From: Owen .


I'm with the NAB too and I certainly don't get my DSR calculated like this. What branch are you with and if possible the name of your Personal Banker. I've printed this and would like to show my Personal Banker the details.

Email me if you don't want to post the reply.

Owen
(aka Mary in the old forum)
 
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Reply: 2.1.1.1.1.2.1.1.1
From: Marina. L


Hi Owen,

I remember the first time I got my DSR calculated it was with someone else, and I recall back then it was a diferrent calculation. They took only 70% of Rental.
Since then we have been given a private banker and now i make it a point to analyze every figure and ratio.
The banker spent a good half an hour going through the Dsr calculation

I am not sure why your banker does not calculate it this way, but I find this way gives a better DSR result.

The beauty of it is when interest rates drop, you can go and recalculate your committments by the new interest rates and presto you have a lower DSR, meaning you can access more cash.

I am a bit hesitant in giving you the bankers name in case it jeopardizes my DSR issue. I could be opening a can of worms so to speak.( I hope you understand)

As you have read all the banks calculate it differently and each different banker calculates it differently as well. It seems like there is no set rule.



MARINA

This is arial
 
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Reply: 2.1.1.1.1.2.1.1.1.1
From: Owen .


OK. Thanks for the information Marina. I'll check it out with my banker and if I don't get any joy, there are plenty of other banks waiting for my business.

Owen
(aka Mary in the old forum)
 
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