Rent reliance

[WebBoard]

From: H T


A funny thing happened to me when I went to the locaal bank to get some papers for our new PPOR. The loan person said we could lend another 500k (currently have about 1.3) odd but that we may be viewed as being to "rent reliant" before they let us have much more, despite our ip's coming in about even and our hefty incomes and an lvr in the low 60's. I thought the name of the game was to be rent reliant right up till you live off the rent from them increasing through gradual rent increases.

Are these people getting nervy at what they've lent us or is it time to start doing business with another bank so they start fighting for our business??
I wonder how these punters get to own 80 properties then, cause i cant see anyone would not rely on the rent to pay the interest on the loans on 80 properties
Have the banks cottoned on to vacancy rates or something??

 

[Rolf Latham]

Reply: 1
From: Rolf Latham


Hi HT

Its most lenders way of saying either:

Start taking your business elsewhere or
use a lending structure that makes use of that dead equity - aka Uncle Steve Navra's annuities.

Alwo worthwhile looking at whom you are currently using foir you lender because they are significantly different in what they will lend. At your level it could be 250 to 500 k

ta

Rolf

 

[WebBoard]

Reply: 2
From: Verity J


H T

Most banks don't allow rental income at 100% as they do with PAYE income. Generally they calculate rental income at between 70 to 80%. The main reason for this is to allow for vacancy and other associated expenses.

Having said that I believe there are some lenders out there who will calculate rental income at 100% but I am not aware of who they are personally.

How rent reliant is your application? I ask this as in some circumstances depending on the person you are dealing with they can actually push deals through even if there is some rent reliance especially since the LVR is quite reasonable. This is the difference that can be made by dealing with someone within any lending institution who knows there stuff and is prepared to put a strong case forward to their credit area.

I must admit though I amazed that banks don't always think forwardly enough to allow for the fact that a lot of PAYE incomes these days are far less secure then they ever used to be. I would think that someone who is and has been successfully investing in the real estate sector would actually be of far less risk.

I am also interested in reading of other people's experiences in regard to rent reliant deals.
How did you work around it. Did changing lenders make a difference or was it how you put it forward to the lenders ?

Verity

 

[WebBoard]

Reply: 2.1
From: The Wife



Have other sources of income?

Banks like to see diversified sources of cashflow.

Pay down some debt?

 

[Rolf Latham]

Reply: 2.2
From: Rolf Latham


Hi Verity

The amount of rental income allowed for in service calcs has usually little do with the issue of rental reliance.

Even those lenders that claim to allow 80 to 100 % claw back that measly extra component by loading their service margin to a greater extent.

A very good example is Westpac and St George.

Westpac assess an I/O 30 year loan at the current variable rate + a 1 % buffer on a PI& basis over 25 years. They allow 75 % of gross rental.

St George assess the same loan at a service margin of 7.95 %, which is almost 2 % above he current variable rate - yes they will allow 80 % and yes they will also allow some tax deductions.

At the end of the day, rental reliance is a strategy used by lenders to reduce the risk exposure, and most describe it as a function of more rent than PAYE income, that goes to service committments. The only lender with a clear cut printed formula is ANZ.

You are absolutley right about how the deal is presented, segmented and whether you are dealing with an asssessor who is advesorial or who's job is to get the business.

I have cases on file where a reconstruction of the the clients financial picture increased their borrow cap by a cool 500 000 from a < 1 000 000. This is without at that stage resorting to annuity based strategies.

The most important thing from the start is to have a free and flexible structure that does not sterilize equity growth

Ta



Rolf

 

[WebBoard]

Reply: 2.2.1
From: Verity J


Rolf

Thanks for your post that explains things in much more detail.

My questions now are how does one go about finding how the lenders actually look at rental income?

Can you please explain the term "sterilize equity growth"

Verity

 

[Rolf Latham]

Reply: 2.2.1.1
From: Rolf Latham


Hi again

You can do the rounds of all the lenders and ask the questions, and get three different answer from the same lender at different branches.

Alternatively you can use an experienced independent mortgage broker who has generally already done that a few times over. If they dont get the loan over the line they dont eat, so they tend to have a somewhat better motivation to getting the deal done than do most employees

One can sterilize equity in a number of ways:

Fix loans with a lender where your borrow capacity is limited, makes it difficult to take xtra money out of the equity growth.

Cross collateralise with a lender where youre borrow cap is limited, further equity growth is sterilised unless your new lender will take a second or collateral mortgage, and it is then a little more difficult to take one of your properties elsewhere.

Ta

Rolf