All Topics / Finance / Calculating equity loan?

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  • Profile photo of MrUniqueNameMrUniqueName
    Member
    @mruniquename
    Join Date: 2008
    Post Count: 25

    Hi everyone

    My wife and I have a property with about $260k equity in it (our PPOR) and we're now wanting to buy an IP. I'm just wondering if anyone knows how to calculate our borrowing power when taking into account my salary, expected rental returns/depreciation benefits etc and also the equity in our property? Obviously we'd be using that equity as security for the IP loan…

    Thanks for any help that you can give :)

    Dave.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Dave

    The amount of equity you have has little bearing on the amount you can borrow unless it is under a lodoc style loan.

    Banks work out the amount they will lend you under a variety of serviceability calculations working out your income and expenditure.

    In a nutshell they will take your net monthly income add to this the expected rent at say 80% of the Gross received figure and subtract your monthly mortgage committments (usually worked out at say an interest rate of 1.5% higher than the standard variable rate) a percentage of your credit card limit and end up with a monthly surplus.

    They would then divide this figure by the monthly factor of Principal & interest for the interest rate + say 1.5% (Maybe $8.34 / 000) and this would give you a total number of thousands you can borrow.

    This rather crude example does not take into consideration any negative gearing addback or other factors but will at least give you a guide.

    After you have worked out the amount to borrow you then need to ensure that your Broker structures the loan in such a manner to ensure that the securities are not cross collateralised and are set up to maximise your tax deductions and to provide you with maximum flexibility.

    Richard Taylor | Australia's leading private lender

    Profile photo of MrUniqueNameMrUniqueName
    Member
    @mruniquename
    Join Date: 2008
    Post Count: 25

    Wow! Certainly a lot more confusing than I originally thought.

    Could you clarify what you mean by: "They would then divide this figure by the monthly factor of Principal & interest for the interest rate + say 1.5% (Maybe $8.34 / 000)"

    I'm not sure I understand what you mean here…

    Thanks!

    Dave.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Dave

    Assume you have a surplus of say $2000 / month and you divide it by $8.34 it gives you a borrowing amount of around $240,000

    Sorry in the above calculation i forgot to deduct from your expenses your living allowance which is taken usually from the Henderson Povery scale and is a anticpated expenditure scale the Banks use. 2 Adults and say 1 Dependant might mean they expect you to spend circa $1950 / month on General Living.

    Your Broker will have all these figures to hand as there are many variables.

    Let us now if you need any more information.

    Richard Taylor | Australia's leading private lender

    Profile photo of RaymondBDMRaymondBDM
    Member
    @raymondbdm
    Join Date: 2008
    Post Count: 32

    Hi Dave/MrUnique
    it's really not that confusing or difficult.
    the assessment rate is usually 1% above the standard variable to give the insitution more comfort
    happy to work it out for you if you want to email me, i have a calculator that one of the lenders use
    otherwise there are manual ways as Qlds007 mentioned above.

    cheers

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Raymond, i think your 1% is slightly optimistic.

    4 of the 5 majors use minimum 1.5% above SVR and all 5 use a different HPS figure.

    1 of them uses the actual repayment rate if the loan is fixed whilst the others still use the variable rate.

    The percentage liability of your credit card limit varies slightly with each of them with 2 using a nil monthly amount of you repay the debt each month and can evidence this over a 3 month period.

    1 adds on a percentage of the monthly repayment as a further buffer and we havent even got onto the percentage of rental income, FAS or other considerations.

    All of this assumes the client is PAYG and not S/E as that is a further pandoras box.

    Maybe not confusing but varies considerably from lender to lender.

    Richard Taylor | Australia's leading private lender

    Profile photo of RaymondBDMRaymondBDM
    Member
    @raymondbdm
    Join Date: 2008
    Post Count: 32

    Qlds007
    Agree with what you say, it varies lender to lender

    we (Rams) are currently using 7.59% as assessment rate which is 1% over the cheapest variable rate product, and much lower for fixed rates…

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Yes as i say the 5 majors vary including your current owner.

    Richard Taylor | Australia's leading private lender

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