Need help understanding something about borrowing capacity

[Radicals]

Hi guys

I'm hoping to be purchasing an investment property (if everything goes well) but I'm having trouble understanding something.

So I'm looking at lenders and finding out how much I could borrow for a potential property, for example. Now it's going to be an investment property, not my place of residence, in fact it's in a whole other city than where I live.

If I'm buying a cashflow neutral investment property, why does my income still matter so much?

Let me put it another way;
Take a potential investment property, 3 bedroom, 600 square metres of land, history has shown it to be leased out 50 weeks of the year on average. So the *tenants* are paying the mortgage (it's cashflow neutral/breakeven). Sure for those "loose" weeks of the year (maybe 5 max), I should be paying the mortgage, sure, ok.

But if an investor wants money for a cashflow neutral property that has a good leasing record, why don't banks jump at this? And another question; I think banks use a percentage in some calculation, someone told me maybe it was a percentage of the income from the property? Can someone explain that one to me? (I don't know what it means so I can't explain it much better...)

It's just I work 3 part time/casual jobs and am just dying to get into the market and I feel so held back by this, even though I'm trying to get other's money working for me, you know, being smart about it? I just have this outdated notion that people who are smart with money should be rewarded But it's seeming like a huge wall right now...

Thanks!

 

[j_p]

Basically because s**t happens. Banks need to assess for this and manage their risk and exposure.

Real question is why are you doing this yourself? Get yourself a mortgage broker ASAP who will do all the sums for you and get you the best loan for your purposes. You can ask for X amount of dollars and a good MB will say yes or no and how to get a yes if it is a no. Simple.

Nitty gritty behind it all doesn't matter.

 

[Terry_w]

If I'm buying a cashflow neutral investment property, why does my income still matter so much?

vacancy, repairs, changes in rents, changes in rates.

 

[Radicals]

Basically because s**t happens. Banks need to assess for this and manage their risk and exposure.

Real question is why are you doing this yourself? Get yourself a mortgage broker ASAP who will do all the sums for you and get you the best loan for your purposes. You can ask for X amount of dollars and a good MB will say yes or no and how to get a yes if it is a no. Simple.

Nitty gritty behind it all doesn't matter.

Thanks!

Yeah I do have a MB, I meant I was talking to lenders through my MB sort of thing. Do you know anything about this percentage of income thing?
My MB told me something like "Banks look at 80% of the income from the property", does that mean they only factor 80% of my rental income, towards my borrowing capacity? Or something else?

 

[Terry_w]

My MB told me something like "Banks look at 80% of the income from the property", does that mean they only factor 80% of my rental income, towards my borrowing capacity? Or something else?

Basically yes. But every lender has a different way of calculating serviceability.

 

[Rolf Latham]

Basically yes. But every lender has a different way of calculating serviceability.

Not much longer

One lender tells me that the new calc is called the APRA hensive servicing calculator and all lenders will need to do pretty much the same, and Badge Engineer APRA's concepts into something that looks different.

Personally, cant see how that will help the consumer, so lets see if its true

ta
rolf

 

[Peter_Tersteeg]

Thanks!

Yeah I do have a MB, I meant I was talking to lenders through my MB sort of thing. Do you know anything about this percentage of income thing?
My MB told me something like "Banks look at 80% of the income from the property", does that mean they only factor 80% of my rental income, towards my borrowing capacity? Or something else?

Lenders take 80% of the rental income, because the other 20% goes towards other holding costs. Rates, property management, maintenance, vacancy, insurance.

They also look at the affordability differently from yourself. Whilst you've decided that based on repayments at 4.5% interest only the property is affordable, lenders might use figures of up to 8% given that rates can (and will) increase, over a 25 year P&I schedule (which is what happens after your I/O period expires).

As a result, whilst you may think the property is neutrally geared, it probably actually isn't and by the banks more conservative lending rules it definitely isn't. Hence they ask questions about your own income and other personal financial circumstances as well.

 

[Terry_w]

Not much longer

One lender tells me that the new calc is called the APRA hensive servicing calculator and all lenders will need to do pretty much the same, and Badge Engineer APRA's concepts into something that looks different.

Personally, cant see how that will help the consumer, so lets see if its true

ta
rolf

ha ha - it is looking that way!

 

[Radicals]

Lenders take 80% of the rental income, because the other 20% goes towards other holding costs. Rates, property management, maintenance, vacancy, insurance.

They also look at the affordability differently from yourself. Whilst you've decided that based on repayments at 4.5% interest only the property is affordable, lenders might use figures of up to 8% given that rates can (and will) increase, over a 25 year P&I schedule (which is what happens after your I/O period expires).

As a result, whilst you may think the property is neutrally geared, it probably actually isn't and by the banks more conservative lending rules it definitely isn't. Hence they ask questions about your own income and other personal financial circumstances as well.

You explained it all very well, thank you.

 

[allegria]

Hi guys

It's just I work 3 part time/casual jobs and am just dying to get into the market and I feel so held back by this, even though I'm trying to get other's money working for me, you know, being smart about it? I just have this outdated notion that people who are smart with money should be rewarded But it's seeming like a huge wall right now...

Thanks!

I hear you!! Just want to encourage you that your dream will eventually come true. It did for me You're determined. Don't jump in though to just any property because "i can afford it" (i.e. the bank will lend me enough), make sure it still sticks up as a strong investment and if you have to wait a little longer to save more/earn more/find a better property definitely wait.

 

[Radicals]

I hear you!! Just want to encourage you that your dream will eventually come true. It did for me You're determined. Don't jump in though to just any property because "i can afford it" (i.e. the bank will lend me enough), make sure it still sticks up as a strong investment and if you have to wait a little longer to save more/earn more/find a better property definitely wait.

Thanks for the encouragement! Can you tell me a little bit more about your experience?