Tactics to increase borrowing capacity

[ssimpson2003]

Hi SS'ers

No doubt one of the biggest challenges of late and an ongoing threat facing property investors of all shapes and sizes is difficulty obtaining finance.

Sure competition is ramping up between the banks, and some claim this is assisting to relax lending criteria, however it seems there is one major speedhump slowing investors down - Valuations.

I keep hearing horror stories about low vals coming back with valuers scared off by bank wrist slapping and in some cases worse - ie removing them from their valuation panel. There seems to be an unwritten rule at the moment that sees valuations coming in at at least 5-15% lower than market prices.

I have 2 questions:

1. What tactics (if any) are you employing currently to get the best valuation possible for your existing properties?

2. What do you find are the best loan structures for leveraging maximum borrowing capacity? eg: Are there any lenders out there that will X-coll a portfolio, without having to revalue the entire portfolio each time you want to purchase a new property?

Please note this is purely about how to increase your borrowing capacity with the assumption that servicability is no issue, and all the basics like reducing credit card limits etc has been done.

cheers

 

[RumpledElf]

Well then this is a thread about increasing valuations then, not increasing borrowing capacity. Cos that is pretty heavily pegged to income.

 

[Dazz]

I find employing the Valuers directly, rather than have the Bank issue instructions to the valuers, helps slightly.


For example, last time I got a valuation done, Jan this year, I let the Bank do it - (I had to pay for it of course but wasn't privy to either the instructions issued from the Bank nor the valuation itself without begging and scraping for it.


I found out - cos the instructions from the Bank are appended at the back of the valuation, that they had requested that the Valuer simply value the property as an empty block. There was obviously lots of very valuable infrastructure on it, and a Tenant in place paying good rent.....but the Lease had only 1 year to go in a 7 year Lease.....so the bank wanted to know what it would be worth with the Tenant gone and the property bulldozed. Joy !!


Now that the Tenant has resigned for a 3 year extension to the Lease, the Bank now wants fresh valuations done....and is happy for me to spend another 5K getting it compiled. This time they said I could organise it all, and that means that the Valuer has to do a true market valuation, including the infrastructure on the Land plus the cashflow from the Tenant.....it should come up much healthier this time.


Valuers and Banks and solicitors.....always looking to cover their @r$3.....and with only one other party to the transaction - me as the investor.....guess whose @r$3 is exposed !!!

 

[ssimpson2003]

Well then this is a thread about increasing valuations then, not increasing borrowing capacity. Cos that is pretty heavily pegged to income.

I guess so. Also adding the structuring component to the disucssion. Basically i'm trying to find out how people increase their borrowing capacity on the assumption servicability is not an issue. It's a challenge facing anyone with a high LVR wanting to continue expanding their portfolio in the current climate.

 

[ssimpson2003]

I find employing the Valuers directly, rather than have the Bank issue instructions to the valuers, helps slightly.


For example, last time I got a valuation done, Jan this year, I let the Bank do it - (I had to pay for it of course but wasn't privy to either the instructions issued from the Bank nor the valuation itself without begging and scraping for it.


I found out - cos the instructions from the Bank are appended at the back of the valuation, that they had requested that the Valuer simply value the property as an empty block. There was obviously lots of very valuable infrastructure on it, and a Tenant in place paying good rent.....but the Lease had only 1 year to go in a 7 year Lease.....so the bank wanted to know what it would be worth with the Tenant gone and the property bulldozed. Joy !!


Now that the Tenant has resigned for a 3 year extension to the Lease, the Bank now wants fresh valuations done....and is happy for me to spend another 5K getting it compiled. This time they said I could organise it all, and that means that the Valuer has to do a true market valuation, including the infrastructure on the Land plus the cashflow from the Tenant.....it should come up much healthier this time.


Valuers and Banks and solicitors.....always looking to cover their @r$3.....and with only one other party to the transaction - me as the investor.....guess whose @r$3 is exposed !!!

Thanks for the feedback Dazz, very interesting indeed.

I was thinking perhaps a nice trick would be to find out which valuers are on the lender panel and commissioning them to do an independent val prior to speaking with the bank. Then go to the bank and request loan based on that valuation. Surely they couldn't reasonably refuse given it came from their own panel of valuers? although the words "reason" and "bank" should probably be left as mutually exclusive for the time being.

I also note from a few previous threads you seem to be in the X-coll corner. Do you have any tips on how best to approach this? It seems logical to me that as a general rule you will have a higher borrowing capacity with that kind of structure. Of course there are always exceptions to every rule.

For others reading this, i'm not trying to start a X-coll debate, just trying to gain knowledge from a more experienced investor.

cheers

 

[Peter_Tersteeg]

Sure competition is ramping up between the banks, and some claim this is assisting to relax lending criteria

Please note this is purely about how to increase your borrowing capacity with the assumption that servicability is no issue, and all the basics like reducing credit card limits etc has been done.

Valuation results have very little to do with lending criteria. You can do things like provide your own list of recent sales you believe to be 'comparible', but my experience is valuers tend to make their own decisions on this sort of thing.

Dazz's suggestion of employing the valuer first is excellent. We've successfully used this in the past. I even had a case where the lender ordered a valuation which came back lower than the purchase price. It was very quickly amended when we waived our own valuation at them!

From a valuers perspective, X-coll doesn't change anything. The valuer isn't privy to the structure of the deal, so if the valuations don't stack up, X-coll is unlikely to change anything (unless you've got more security you can also offer). X-coll actually has the potential to generate a worse result, such that one property might go up in value, but another security property might drop in value, thus the two cancel each other out.

My understanding that Dazz's advocacy of X-coll is to make a tricky deal more comfortable to the bank, not to get a better valuation.

Don't assume that because banks are being compeditive that they are willing to relax their lending criteria. Certain policies can be bent, but lending is now heavily regulated and lenders are going overboard to ensure that they comply with these regulations. There are certain areas where you simply can't bend the rules with lenders these days.

 

[ssimpson2003]

Valuation results have very little to do with lending criteria. You can do things like provide your own list of recent sales you believe to be 'comparible', but my experience is valuers tend to make their own decisions on this sort of thing.

Dazz's suggestion of employing the valuer first is excellent. We've successfully used this in the past. I even had a case where the lender ordered a valuation which came back lower than the purchase price. It was very quickly amended when we waived our own valuation at them!

From a valuers perspective, X-coll doesn't change anything. The valuer isn't privy to the structure of the deal, so if the valuations don't stack up, X-coll is unlikely to change anything (unless you've got more security you can also offer). X-coll actually has the potential to generate a worse result, such that one property might go up in value, but another security property might drop in value, thus the two cancel each other out.

My understanding that Dazz's advocacy of X-coll is to make a tricky deal more comfortable to the bank, not to get a better valuation.

Don't assume that because banks are being compeditive that they are willing to relax their lending criteria. Certain policies can be bent, but lending is now heavily regulated and lenders are going overboard to ensure that they comply with these regulations. There are certain areas where you simply can't bend the rules with lenders these days.

Thanks for the reply PT Bear.

Apologies i'm not sure i explained myself correctly...either that or i don't understand what you mean. When you say valuations have very little to do with lending critera, this is different to my understanding. I assumed that no matter what your income, your cash and equity position is a key criteria in determining how much the bank will lend to you. The obvious answer to this problem is to save cash or wait for the value of your propery increase, but my concern is that the bank vals are getting more and more conservative, so therefore the ability for investors to expand their portfolio's is becoming stunted.

I agree Dazz's suggestion is a good one, and I certainly plan to use it myself, hopefully being able to find the valuers on a lender panel as descibed above as well. I was hoping there might be some additional tips or tricks out there to help increase the vals.

With regard to Xcoll'ing - sorry i may not have explained myself well here either. I wasnt suggesting it had anything to do with the valuations or the valuer, i was just trying to look into alternative methods to increase borrowing capacity that doesn't involve saving vast amounts of cash or waiting years for capital apprecation to outgrow the valuers initial undervaluation if that makes sense. If this can be achieved through changing the loan structure of my portfolio (or any other way for that matter) then i'd be love to investigate more. It's quite possible that Xcoll or non Xcoll will have no impact to borrowing capacity, i'm just brainstorming and trying to understand if there is a benefit either way.

I believe accessing enough funds to meet my goals will be the biggest hurdle in my 10 year plan, and quite possibly many others on here.

thanks again PT, any other tips would be greatly appreciated.

cheers

 

[Peter_Tersteeg]

Sorry, I didn't explain my post properly in regards to lending criteria and valuations.

Of course valuations do have quite a bit to do with lending criteria. Lenders will only lend you a percentage of the value of the security. The percentage will depend on any number of parameters and this is one of the factors that determine the maximum amount you can borrow.

The other criteria is your income and ability to service existing and new debts. If this doesn't stack up, then it doesn't matter how much security you've got, lenders won't give you money.

With regards to relaxation of lending criteria, lenders can be relaxed about valuations if they choose to be. They have far less flexibility with the affordability side of the equation.

 

[Rolf Latham]

I was thinking perhaps a nice trick would be to find out which valuers are on the lender panel and commissioning them to do an independent val prior to speaking with the bank. Then go to the bank and request loan based on that valuation. Surely they couldn't reasonably refuse given it came from their own panel of valuers? although the words "reason" and "bank" should probably be left as mutually exclusive for the time being.

Its possible, we attempt it weekly.

Only useable with lenders that dont use Valex AND have a single panel valuer to a Postcode, a good eg is Wesuck

Got a 1.25 val on a Syd place a month ago using the strategy where I suspect we made 50 k


ta

rolf

 

[Rolf Latham]

I agree Dazz's suggestion is a good one, and I certainly plan to use it myself, hopefully being able to find the valuers on a lender panel as descibed above as well. I was hoping there might be some additional tips or tricks out there to help increase the vals.

My main concern with going fwd with the 'edge' philosophy is that this may add a little to your portfolio in the middle to long term. If you have a good amount of resources already, then you are probably going to use such a strategy to maxmise the risk buffers you can carry, and thereby increase leverage and growth.

If your resources mean you are looking at having to use LMI a lot, then the strategy has just become "hope", and hope aint no ongoing strategy.

ta
rolf

 

[ssimpson2003]

My main concern with going fwd with the 'edge' philosophy is that this may add a little to your portfolio in the middle to long term. If you have a good amount of resources already, then you are probably going to use such a strategy to maxmise the risk buffers you can carry, and thereby increase leverage and growth.

If your resources mean you are looking at having to use LMI a lot, then the strategy has just become "hope", and hope aint no ongoing strategy.

ta
rolf

Thanks for the feedback Rolf.

I just want to make sure I understand what you are saying. Does this "edge philosophy" mean trying to stay close to your LVR limit?

If so, are you saying a poor strategy would be simply to buy anywhere that fits in your narrow borrowing capacity simply to add another property to your porfolio and therfore maximise leverage?

If so, completely understand. I'm not suggesting that per se, more the fact that without realisitc valuations, it's going to take us mortal investors a lot longer to expand a portfolio with well reasearched property that fits within a long term strategy.

Thanks again for the tips above, I'm currently with Wolfpac so that might work well for me.

 

[ssimpson2003]

Sorry, I didn't explain my post properly in regards to lending criteria and valuations.

Of course valuations do have quite a bit to do with lending criteria. Lenders will only lend you a percentage of the value of the security. The percentage will depend on any number of parameters and this is one of the factors that determine the maximum amount you can borrow.

The other criteria is your income and ability to service existing and new debts. If this doesn't stack up, then it doesn't matter how much security you've got, lenders won't give you money.

With regards to relaxation of lending criteria, lenders can be relaxed about valuations if they choose to be. They have far less flexibility with the affordability side of the equation.

Thanks PT, makes complete sense. I think we were on the same page the whole time haha.

Completely understand re the other lending criteria, i guess yes it probably all does come back to that valuation for me at the moment.

Interesting comment re: lenders being relaxed with their criteria if they want to be. I guess we just need to provide them with what they want to see. Good food for thought.

cheers

 

[RumpledElf]

I assumed that no matter what your income, your cash and equity position is a key criteria in determining how much the bank will lend to you.

Totally opposite to my experience. They look at your income, decide they can lend you $X, and completely ignore your equity. The cash gets used up to make up the difference between the $X they give you and the $Y needed for the deal. I've just been wristslapped by the bank for going $240.75 over budget and they're making it out like its a big deal that we've gone over our affordability line after taking all our savings and OMG how are we going to get that last $240.75 together. Stupid bank. I can understand if we went $20k over budget but not by such a small amount when we don't even have to pay this loan back yet ...

For me, having a very fixed maximum amount that anyone will lend me, the only way to increase my borrowing capacity is to stop freelancing and get a job as a checkout chick or something so I don't need umpteen years of tax returns and can just wave 2 paycheques at them instead. If I had $500k equity instead of only $250k I'd still have the same borrowing capacity of $0. Or rather -$240.75 ...

 

[ssimpson2003]

Totally opposite to my experience. They look at your income, decide they can lend you $X, and completely ignore your equity. The cash gets used up to make up the difference between the $X they give you and the $Y needed for the deal. I've just been wristslapped by the bank for going $240.75 over budget and they're making it out like its a big deal that we've gone over our affordability line after taking all our savings and OMG how are we going to get that last $240.75 together. Stupid bank. I can understand if we went $20k over budget but not by such a small amount when we don't even have to pay this loan back yet ...

For me, having a very fixed maximum amount that anyone will lend me, the only way to increase my borrowing capacity is to stop freelancing and get a job as a checkout chick or something so I don't need umpteen years of tax returns and can just wave 2 paycheques at them instead. If I had $500k equity instead of only $250k I'd still have the same borrowing capacity of $0. Or rather -$240.75 ...

Thanks for the reply Rumpled, but apologies, i just don't get it. if you have existing assets with loans against them this will surely impact your borrowing capacity.

eg: say i had $1m in assets at 90%LVR, and am earning $1m per year. Based on my enormous servicability, i want to buy a $3m property taking my new assets to $4m and my loans to $3.9m...that would be a stretch in itself to convince the bank to approve (not to mention costly with LMI). BUT then the valuer comes in and says the new property is only worth $2.5m (to cover his butt). Sure i can afford the repayments no problem, but will the bank allow me to take my borrowings up to $3.9m on assets assessed at $3.5m?

Therefore valuations are surely cruicial to determining borrowing capacity. Unless of course i'm missing something??

re: the $240. unbelievable! again reason and banks = multually exclusive

 

[Peter_Tersteeg]

Thanks for the reply Rumpled, but apologies, i just don't get it. if you have existing assets with loans against them this will surely impact your borrowing capacity.

eg: say i had $1m in assets at 90%LVR, and am earning $1m per year. Based on my enormous servicability, i want to buy a $3m property taking my new assets to $4m and my loans to $3.9m...that would be a stretch in itself to convince the bank to approve (not to mention costly with LMI). BUT then the valuer comes in and says the new property is only worth $2.5m (to cover his butt). Sure i can afford the repayments no problem, but will the bank allow me to take my borrowings up to $3.9m on assets assessed at $3.5m?

Therefore valuations are surely cruicial to determining borrowing capacity. Unless of course i'm missing something??

re: the $240. unbelievable! again reason and banks = multually exclusive

Rumpled Elf is getting back to the affordability side of the equation. the income in his example isn't high enough to meet the lenders criteria to borrow the amount he wants, so the amount of equity is irrelivent.

In the simplist sence, equity comes down to how much deposit you've got available.

In the example you've given (and without doing the actual sums), the bank will not allow you to borrow $3.9m against assets worth $3.5m. If they need to sell the assets, they would not be able to recover their money.

Given the amounts in excess of $1m, you'd be doing well to be able to borrow 80% of the asset values. Don't even think about LMI.

re: $240 deficit in affordability - it's entirely reasonable. Lenders need to be able to draw a line in the sand somewhere. In many cases they're actually too generous with how much they'll lend.

$1 surplus in lenders calculations assumes a 1.5% increase in interest rates and it assumes that your cost of living is right on the poverty index. In truth most people live on 2-3 times the poverty index figures. They can't afford what the lender might be willing to give and maitain what they consider to be a reasonable lifestyle.

 

[RumpledElf]

Rumpled Elf is getting back to the affordability side of the equation. the income in his example isn't high enough to meet the lenders criteria to borrow the amount he wants, so the amount of equity is irrelivent.

Exactly. I could sell everything, have $350k in the bank and I'd still only be able to borrow exactly the same amount that I currently owe, and then only with one bank, it'd be far less with any other bank.

Edit: actually not true, they'd give us $30k more if we didn't own any property, forgot about that one

Income is actually *the* most important part. For your average joe they hit the servicability wall on income, especially if they negatively gear. Equity tends to be most important for your first couple of purchases, or if you fail some criteria of LMI but not the bank's criteria and need a higher deposit and valuations matter.

Should read some of the living on equity threads ... LOE sounds good but you're still stopped dipping into the equity ATM by your income.

 

[Aaron_C]

Should read some of the living on equity threads ... LOE sounds good but you're still stopped dipping into the equity ATM by your income.

Unless you go lo-doc

 

[Peter_Tersteeg]

Unless you go lo-doc

Sadly getting $100k cash out each year on lo doc when you're not really self employed is a bit of a pipe dream these days.

My observation of people successfully implementing a LOE strategy, is that their financial situation is so strong that they don't actually need the strategy, they use it to add value to the other things they're doing.

 

[RumpledElf]

Thought lo-doc loans went the way of the dodo ages ago?

We used to have one, couldn't get another one, had to go full-doc. You saying there's still lenders that don't require proof of income as per the new ASIC rules?

 

[Aaron_C]

Thought lo-doc loans went the way of the dodo ages ago?

We used to have one, couldn't get another one, had to go full-doc. You saying there's still lenders that don't require proof of income as per the new ASIC rules?

Nah they're still around. Like Peter said it's harder - but it's not gone by any means.