Serviceability wall
- Thread starter eggnog
- Start date
Assuming that you've already shopped around and you've really hit your borrowing capacity limit like I had, these are a few things that I did. Firstly I cancelled all my credit cards (30k worth), I then put my girlfriend on our lease which technically cuts my rent in half, so $1000 a month). And I'm deferring all my big business deductions into FY 2016 (40-50k worth) so that I have a higher income. This means I pay higher taxes now but will pay less next year. So I've managed to go from maxing out my borrowing limit to getting another half million or more
Most i find can borrow a lot more than they think with rates this low. Have quite a few clients with 15ish properties and reasonably average incomes (<100k). Its quite possible to grow very large portfolios (3-5mill plus right now with this type of income, right purchases and minimal other expenses).
Few basic tips:
1. Ensure all loans are I/O, including PPOR.
2. Switch to lenders that assess your current mortgage debt at the actual repayment you take.
3. Maximise your borrowing capacity by removing unused credit cards, other expenses, renegotiate to lower rates, etc.
Bigger tips that may require lifestyle adjustments:
1. Divest of poor yielding assets (3%).
2. Focus on increasing income that can be used for servicing.
3. Purchase higher yielding assets.
4. Pay off PPOR debt and switch to investment debt (negative gearing inclusion can make a difference in serviceability calculations).
Idea is to keep the banks calculation of your 'net monthly surplus' income as high as possible. From there by purchasing at semi decent yields (5.5-6%) and recycling your borrowing power by switching lenders can get you really far.
Biggest impact may in fact be outside your control - changes to the interest rate (and possibly changes in lender appetite to extend I/O terms).
Cheers,
Redom
Few basic tips:
1. Ensure all loans are I/O, including PPOR.
2. Switch to lenders that assess your current mortgage debt at the actual repayment you take.
3. Maximise your borrowing capacity by removing unused credit cards, other expenses, renegotiate to lower rates, etc.
Bigger tips that may require lifestyle adjustments:
1. Divest of poor yielding assets (3%).
2. Focus on increasing income that can be used for servicing.
3. Purchase higher yielding assets.
4. Pay off PPOR debt and switch to investment debt (negative gearing inclusion can make a difference in serviceability calculations).
Idea is to keep the banks calculation of your 'net monthly surplus' income as high as possible. From there by purchasing at semi decent yields (5.5-6%) and recycling your borrowing power by switching lenders can get you really far.
Biggest impact may in fact be outside your control - changes to the interest rate (and possibly changes in lender appetite to extend I/O terms).
Cheers,
Redom
Lots of peops buy high quality GROWTH assets that return ZIP even ( eg land banking)
Just depends on if thats fits your resources.
One our fin planning side, we do a bunch of work around rebalancing portfolios for peops as they mature from acquisition to consolidation andincome streaming.
It is common for larger portfolio holders to DUMP the Dogma of "never sell", for better yields, better depreciation, less hassles and maintenance often trading some of their older growth style stock for smaller newer income based stock.
We are even getting a bit of that now with younger less mature portfolios, where the property clock in Sydney is at a place where many feel there are better opportunities elsewhere.
ta
rolf
ta
rolf
Covered very well above.
However, in this case it sounds like you have little/no income but a mountain of cash so, in the absence of Rixter, I will say that if your situation is at it sounds and you've modelled it with your broker/financial planner and your options are exhausted, deposit bonds could be an option. Do a search.
However, in this case it sounds like you have little/no income but a mountain of cash so, in the absence of Rixter, I will say that if your situation is at it sounds and you've modelled it with your broker/financial planner and your options are exhausted, deposit bonds could be an option. Do a search.
RF, I think you're referring to cashbonds..... a deposit bond is a small fee you pay to an insurance company to use their money (instead of yours) for your deposit on a property loan.
Anyway...this is how I have used a Cashbond to keep purchasing IPs. I used it in conjunction with my CGA Property Investment Strategy -
When you have a few IPs under your belt Serviceability eventually becomes an issue. The banks/lenders will not lend you money due to you not meeting their standard lending criteria. As you know banks/lenders work out serviceability under 2 modules - LVR & DSR.
Where the majority of investors start to reach their borrowing capacities is in relation to their DSR or Debt Service Ratio. In other words not enough cash flow income to service their IP debt. Now this isn't a problem if you can increase your income. But how can you do that??
Obviously there are many ways as the mind can conjure up. But the main ways most investors know of is to increase their PAYG income and/or increase their IP rental income. As these methods are fairly well reliant and restricted to market conditions a lot of investors don't know where to go to from there. A lot forget about the store of Equity they have with their low LVR's created over time by past capital growth.
That's where a Cashbond comes into play - which is method I implemented to get me around the lack of serviceability issues and allowed me to keep borrowing to build my Portfolio.
A cashbond basically works by converting existing equity into cash flow for the purposes for increasing your income in the eyes of the banks/lenders.
The way it works is as follows - you purchase a Cashbond/Annuity or guaranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5-10 years. You purchase the Cashbond using funds with drawn from an investment LOC.
For example if you purchased a $100,000.00 cashbond over a term of 5 years, each year you would get $20,000 plus interest paid back to you. Now when you go to the bank for a loan to purchase your next property you can show 100% of that $20,000 income on the INCOMES side of your loan application on top of your existing Payg Income & all your other rental incomes...In other words You have effectively increased your borrowing because you have an extra $20,000 income in the eyes of the banks. Pretty neat hay
You can also use that cashbond income to service your portfolio holding costs as well.....this giving you sleep at night factor knowing you can service the debt comfortably.
This was how I have been able to keep purchasing. Now I know this method is not for everyone.
Its a strategy, for someone further down the investment road, at their disposal that can be used as part of their bigger picture strategy.
A tool for the more experienced investors with substantial size portfolio / equity holdings available to utilise after less impacting options may have been exhausted.
It all depends on your current financial situation, goals, time frames & your personal investor risk profile.
Hope this has provided you & everyone else with some food for thought.
This is awesome rixter i love learning new things! I've read this around 5 times trying to get a better understanding: )
Just have a couple of questions
1.How much money / interest do you have to pay to use this strategy?
"A cashbond basically works by converting existing equity into cash flow for the purposes for increasing your income in the eyes of the banks/lenders."
2.How aggressive where you when you were using this strategy with your lvr?
3. Have all the banks been happy to use this form of income ?
4. Using your example of the "20k per year over 5 years " does that come in one lump sum or is it paid weekly?
Pretty nifty Rixter - i've seen a couple where people are purchasing ATMs for this purpose too. Effectively transferring capital to cash flow. Generally need two years history on tax returns for it to be included in servicing. I think theres something like a 28% yield on the investment over the lifetime of the asset (reasonably short) with the capital being effectively worthless at the end of the term.
Thanks Rixter. Totally forgot about your cashbond strategy. Something to look into.
How much interest do these annuity funds pay you back? Is it higher than an offset account interest rates?
You also mentioned it is not for everyone. Care to enlighten who or what scenarios this strategy wouldnt work.
Any brokers wanna chime in on pros and cons? Do they really count all of the annuity as income or only a percentage? Is it really this simple to increase your serviceability?
How much interest do these annuity funds pay you back? Is it higher than an offset account interest rates?
You also mentioned it is not for everyone. Care to enlighten who or what scenarios this strategy wouldnt work.
Any brokers wanna chime in on pros and cons? Do they really count all of the annuity as income or only a percentage? Is it really this simple to increase your serviceability?
that would be sensational.............. but alas no, the cash you provide for the annuity will in part be lent to mortgage providers, so the annuity provider needs to make a slice as does the retailer
ta
rolf
I'm curious about this too.
Also could you draw that 100k from your LOC, stick it in another bank account and claim the interest earned on that as income?
Yes, but what about the expense?
You mean interest on the LOC? Yeah it would cancel each other out which is why I'm confused, because isn't this the same thing? The only difference I can think of is maybe bank interest can't be counted as income?
Not really the same thing because cashbonds are annuties which will pay back the capital plus interest monthly over X years. (which is very similar to the LOC method!) but some lenders used to see the whole monthly payment to the person as income, even though part of it was really capital being returned.
Westpac used to allow these for serviceability but I don't know which lenders will accept them now, if any.
Westpac used to allow these for serviceability but I don't know which lenders will accept them now, if any.
Ah I see, this is the part I missed. I thought they simply paid interest, and then would return you some of the capital at the very end, which is why I was confused.
You pay what ever your LOC interest rate is less CB interest paid back to you.
I set up a $100k CB which returned ~$22k per year over a 5 year term.
Cant answer for all banks but mine was. WBC
Payment options are annually, bi-annual, quarterly, monthly. I chose monthly to maximise CF.
They vary depending upon prevailing financial climate at the time, purchase amounts & term length..2-4%
No.
Possibly anyone with a substantial size asset base and net worth who has exhausted all other less impacting options to increase DSR.
Yes mine did.
You have various payment options available ranging from interest only payments to you with your capital preserved until the final payment, through to capital & interest payments to you evenly spread throughout the CB term.
