Does anyone know how banks calculate the borrowing power for an investment property? Reason being it appears lot lower than a person's primary place of residence.
Let's say I make $80K per year, with no other debts. Most banks would allow me to borrow about $450K, which equates to about $3000/mo, or $700/wk in mortgage, at ~6% over 25 years. Now, if my IP also generates about $700 per week in rental income, plugging this amount into banks' calculators only increase the total borrowing power to about $650K (or about $4200/mo in mortgage payment); a difference of only $200K. Why does my PPOR affords me to borrow $450K versus only $200K for the investment property, given that they are the same monthly payment amount of $700 each?
Granted, banks do consider expenses associated with running an IP, however, even if I were to factor for example $100/week in expenses, the rental income of $600/wk should allow me to borrow way more than $200K for IP.
Thoughts?
Hiya
Welcome aboard.
Different banks have different ways of assessing max borrowing. For that reason, those online calculators aren't very helpful.
For instance, some banks will inflate the repayments on your IP – which will reduce your borrowing capacity.
Some will take the repayments at what they actually are – which helps.
Some banks take 75% – 80% or rental income whereas another may take 100%
There are so many different variables that go into working out max borrowing.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
corrad wrote:a difference of only $200K. Why does my PPOR affords me to borrow $450K versus only $200K for the investment property, given that they are the same monthly payment amount of $700 each?
Granted, banks do consider expenses associated with running an IP, however, even if I were to factor for example $100/week in expenses, the rental income of $600/wk should allow me to borrow way more than $200K for IP.
Thoughts?
– Its pretty simple your current income 80K lets you borrow what you said 450k. When you add a rental property you in most cases are allowed to count 80% of the total rental income to count towards serviceability. This increases how much you can borrow by 200k. You calculator could also be putting it back as principle and interest. Whereas a interest only serviceability, Not repaying the loan the total borrowing power would increase.
Also the negatively gearing effect is not calculated in most of those standard online calculators this also adds to your total borrowing capacity.
Not quite as simple as that wilko.
Some lenders will factor in the deductible interest others do not.
Some lenders will sensitise the existing repayment others will take the actual repayment as a liability.
Some take a percentage of your credit card limit as a liability others will not if you have paid the card in full over the last 2 months.
There is a massive difference between the maximum and minimum amount various lenders will allow.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
One other thing not mentioned is with an investment there might be ongoing rental payments you pay which are an expense that aren't included when buying a PPOR. This will drastically affect borrowing capacity.
As mentioned too many variables are taken into account and it's not as straightforward as might be expected at first glance.
Cheers
Tom
Hi Corrad,
You need to know in and out of each banks policy to get maximum of borrowing capacity based on your specific requirement and financial situation.
This is exactly the conditions where mortgage brokers become helpful.
Basically the banks calculate the borrowing power for an investment property from your income and property.
I think the forum members already know that. They are here seeking much more detailed information than that.
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This reply was modified 10 years, 7 months ago by
Jacqui Middleton. -
This reply was modified 10 years, 7 months ago by Jacqui Middleton.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
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This reply was modified 10 years, 7 months ago by
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