Serviceability

[Queen Bee]

It seems from what my Bank is telling me now, that the more IP's I buy - the more I have to be earning. I thought they took into account the rents as income. So wouldn't it work out that the more properties you acquired the more income you'd be earning. Maybe I'm having a blonde day or something!

My Bank is saying that in between buying IP No. 2 & 3 I now have a shortfall of between $800-$1,000 a month in income, so cannot buy IP No. 4. ($100k). I can't figure it out. I bought all my properties for under $100k and they're all positive cash-flow.

So does this mean that everytime I buy another IP I have to be earning more and more money. Wouldn't that mean by the time I get to No. 20 I'd have to be earning like $1m+ a year? Sounds stupid to me. How do they work out serviceability.


Cheers, QB

 

[Mondie]

Hi QB,

All the banks have different serviceability models, but a lot of them discount your estimated rental income, typically only using 70% of the estimate for income purposes.

So if you bought a $100k property returning 7% then for serviceability calcs the bank will discount this to 70% of $7000 = $4900.

So from this there is now a shortfall in covering the interest payments of $1600 p.y. assuming a 6.5% loan rate. l dont know what model the bank you deal with uses but it would be worth your time to find out. Its generally easy to understand and very useful to know for doing your own assesments and forward planning. Hard to see how you could now be $800-1000 short pm though if your next purchase is +ve geared and your existing IP's are too

 

[duncan_m]

Originally posted by Queen Bee
So does this mean that everytime I buy another IP I have to be earning more and more money. Wouldn't that mean by the time I get to No. 20 I'd have to be earning like $1m+ a year? Sounds stupid to me. How do they work out serviceability.

Bee,

The three main problems with serviceability are these:

1. Most banks only take 70-80% of the rent into account.

2. Most banks do their calculations assuming that you're using Principal and Interest Loans, not Interest Only.

3. Most banks add around 1.5% to the Interest Rate to do the calculation.

So if you were applying for a loan of $100,000 and your interest only payment is just $541pm (6.5%) they'd still do their calculations on P&I at 8% meaning that you'd need to be able to cover a payment of $771 (8% over 25yrs).. And of course you need to be able to do this on 80% of the rent.

Thats one of my main beefs with the Positive Cashflow Approach, you blow your available borrowings on Penny Dreadfuls in backwater shanty towns.

Call me boring, but I'll stick with the J.O.B I enjoy and use the borrowing capacity that I have to buy properties that are going to gain significantly in value.

Not all is lost though, if you spread your loans around a little between banks you'll find that most banks only take into account the ACTUAL payment you are making on loans to other banks when doing their calculations.

 

[sbe]

Get onto a good broker too.

They know how to spread the loans around, and which banks calculate in more beneficial ways etc.

ie As Duncan said, some banks will take other loans at payment value, some dont discount the rent either.

I hit that with St George early on. They calculate all loans based on inflated rates (standard bank practice), 70% rent, and count dependants on EVERY loan, including IP's.

Suffice to say, that kills servicability real quick.....

Shop around.

Cheerio.

Simon.

ps. Duncan, NZ's cheaper than here, plus most property over there appears to be +'ve. That why that game (someone over there) created was criticised as you couldn't have -ve geared property, and could basically buy anything.

pps. I don't profess to know anything about NZ, other than it's somewhere to the right of Australia......

 

[landlubber]

QB,
After "too many" years dealing with banks, the best I can tell you is there are no "standard rules" for serviceability. They change from bank to bank and department to department.

I'd "take a punt" and reckon you are dealing with a "mainstream bank" and at the "retail" level . This is where most "regular" home purchasers deal , and hence where most investors start .

This bank "retail section" deals with a simple, fixed set of rules....like "interest payments CAN'T exceed (say) 30% of gross income." So they could well be adding your rents into your income ...and only taking 30% of them. Yes QB, I know .....and they aren't even blondes !!! This section of the bank is great for home mortgages and first home buyers and maybe one IP ....but after that, as you are finding out, the "retail" rules just don't work.

For your own education, you may like to ask the bank to see the calculations ...just for a laugh !
Or ...you can find your way to the "business" banking section , which deals more with business people and investors , or ,
as many have done before you , you can search out a new lender or broker who understands your numbers.

FYI we are now with our fifth bank in our investing history, and each time we have changed merely because we've been frustrated in our growth endeavours. And the strangest thing , each "NEW" bank has ALWAYS welcomed us with open arms ! How weird is that ? In my darker moments I sometimes think there is a deal between the banks to churn customers so as to keep up the pretence of competition between them . Meanwhile , they all make nice profits.

LL

 

[Queen Bee]

Re: Re: Serviceability

Originally posted by duncan_m
Bee,

The three main problems with serviceability are these:

1. Most banks only take 70-80% of the rent into account.

2. Most banks do their calculations assuming that you're using Principal and Interest Loans, not Interest Only.

3. Most banks add around 1.5% to the Interest Rate to do the calculation.

I'll keep that one in mind. The thing is with this bank (Westpac) I am going through their business section. This guy rings me and tells me all this guff about serviceability and x-coll (see previous post) and when I query him on every little thing he doesn't like it. Everytime this guy said something, I said - "how are you making that assumption" or "no please explain again I still don't understand". In the end, he realised he done some of his calculations wrong.

I am going to go to a mortgage broker I think. I personally don't think there's a shortfall of $800-$1,000 a month considering I only bought my last IP for $65,000 and I'm positive cash flow of $38pw.

Cheers, QB

 

[duncan_m]

Re: Re: Re: Serviceability

Originally posted by Queen Bee
.

I am going to go to a mortgage broker I think. I personally don't think there's a shortfall of $800-$1,000 a month considering I only bought my last IP for $65,000 and I'm positive cash flow of $38pw.

Cheers, QB

I agree, it doesnt sound right.. from memory and I'm sure Rolf will correct me.. Westpac use the Henderson Poverty Index.. and as long as you have $1 left after all expenses then you pass..

I'd be suprised if you cant get it over the line based on the few things you've said.. A couple of other things to keep in mind:

1. If you have a large credit card limit (even if you have a zero balance) they'll take 3% of the available limit each month and add it to your expenses.

2. Threaten to take your business elsewhere. Tell him that Commonwealth or ANZ have already approved your loan and will refinance all of your existing business and ask him "how badly do you want my business to stay with you?" Ask him to prepare payout figures on all of your loans. That'll not only put the wind up him but it'll give your request some more visibility within the bank which may trigger some other actions to retain your business.

3. Make a point of sitting down with him and have him explain to you how their model works.. have him walk you through his calculations, they miss the stupidest things sometimes.. like not taking into account the rent on the NEW property for eg.

 

[Kristine..]

Yep, Credit Card at 36% per annum, even for cards you don't use except for Diners Club and American Express Green Card

And

That $31,000 paid out but still registered mortgage, is still being factored into serviceability.

Queen Bee, if you are using the business branch, they should be calculating 'add backs' such as depreciation and tax refunds. If not, they are not assessing you as a business customer.

I love the Adelaide Bank serviceability model - the tax add backs are factored into serviceability up-front and this can make a huge difference to borrowing capacity.

And although most do, not all lenders apply a margin to the interest rates (and not all margins are the same), which are based on Standard Variable rates of the day across all borrowings and all unused but still registered mortgages and against the full approved value of your Line of Credit even tho the unused balance of LoC would then be an 'asset' in your Statement of Position, from a Serviceability point of view that can be dynamite!

Isn't this fun?

Kristine

 

[Jamie]

Hi Queen Bee..

Have you spoken to a broker yet?

Your best bet is to speak to an independent mortgage broker, who can answer your question in specifics, rather than in general terms through the forum...

Simon, Rolf and Kristine should be able to help you out with any queries you might have...

Best wishes,

Jamie

 

[Rolf Latham]

Hi Jamie

While we can provide some overall advice the credit policies applied in NZ will be a little diff.

Australia is not yet a state of NZ :O).

Serviceability................... Service deficits of 2000 a month can be gotten through some lenders, much depends on the scenario.

Id try a broker, and if that dont work, go to HSBC. finally youre self employed, lo doc product available in NZ ?

Ta

rolf

 

[Queen Bee]

Originally posted by Rolf Latham


Id try a broker, and if that dont work, go to HSBC. finally youre self employed, lo doc product available in NZ ?

Ta

rolf

We are self-employed but have a Limited Liability company. We pay ourselves a wage and then PAYE to the IRD. So we are employers and employees. We also have an LAQC company for our properties.

I have been racking my brains all week about how we could be short by $800-$1000 a month, I've had my sets of financial accounts out for the last financial year (which are the same ones the bank is using) and they are WRONG! I knew it! (By the way, I provided a set of accounts for them back in August last year and when I went for this last pre-approval they said they had gone missing/couldn't find them - what should I do about this. My partner was upset, he said "where the hell are they, does that mean some person has got our accounts and knows all our business - they should find them". Is there anything I can do about that - isn't that negligent?)

I went back over my emails from the original person that did our first mortgages. She has now changed to a new position at the bank. She emailed me a serviceability form that is in excel, which she said is the one the bank uses to determine if someone gets a loan or not. She said to use it next time before we applied, to see if we qualified. I'd forgotten all about it.

Went into it and realised that they haven't been taking all our income into consideration this time.

Duncan

Not sure what they use but I can post this excel sheet if you want, you could probably tell from that.

Anyway, I'm going to write it all down, and then fax it to this idiot at the bank and then hopefully when it gets approved this time, I'm going to ring him up and tell him I'm changing banks.

Cheers, QB

 

[duncan_m]

Originally posted by Queen Bee

Duncan

Not sure what they use but I can post this excel sheet if you want, you could probably tell from that.

Sure, I'd love to see it.. can you email it to [email protected] or attach it here?

 

[whitt]

QB

I invest in NZ and suggest you look around and find an experienced broker which is specialist in investment property.

They know all the servicability rules, which banks would consider which deals etc.. how not to X-Coll, and how to spread loans around various banks.

Well worth a look at broker me think.

Every body is correct on other responses also. Together with those answers and a broker I think you could still be able to get that IP.

 

[Queen Bee]

Duncan

I will email it to you, I can't seem to attach it here. Feel free to post it on the board if you want.

Cheers, QB

 

[peteb]

hey duncan great to see you have this forum listed on your top 10 websites but I'm not sure about 'the onion' .....

 

[duncan_m]

Originally posted by peteb
hey duncan great to see you have this forum listed on your top 10 websites but I'm not sure about 'the onion' .....

The onion was the first to report the ground breaking news that Breast Implants cause problems in mice:

 

[duncan_m]

Here's Queen Bee's spreadsheet.

 

[Queen Bee]

Duncan

R u familiar with this spread sheet?

Cheers, QB

 

[duncan_m]

Originally posted by duncan_m
Here's Queen Bee's spreadsheet.

The spreadsheet just appears to implement the Henderson Poverty Index.. it takes 75% of your rent and adds on your 'after tax' personal and business income. Then depending on how many adults and children you have it checks that you have a specific cash surplus after all loan outgoings (including existing loans) and the new loan.. 5% of credit cards, 2.5% of overdrafts..

For 2 adults and 3 children it requires a cash surplus of $3,944