Hi Tom,

Yeah I downloaded an Excel calculator and kind of worked out that it seems to be a default living expense based on single/couple and number of dependents – cheers for confirming though.

Given they would assume our expenses are per couple then, do they also use my wife's income to assess affordability even if the title and mortgage is to be in my name only?

Cheers

edit – I meant to ask also, what is the highest acceptable percentage for NSR currently, do you know?  The calculator I've got says 95% or less is an automatic pass, and 95% or greater would be referred for consideration – but that calculator is from 2007…  Does the same still hold true just now would you say, and either way does it vary from lender to lender at all or an industry standard?  Thanks!

Hi Tom,

Thanks for sticking with me and replying again!  Between yours and Derek's responses, I've got it now – as mentioned above, this is pretty much what I thought initially, I just didn't word it very well…  I always assumed that lenders would use the LoC limit rather than the drawn-down amount when used in any calculations, I just wasn't as clear whether LoC's should be factored into LVR/DSR calculations or not…

The rationale for salary x 30% was from the book I mentioned previously – the thinking is, around a third of your wages go on tax, a third on living expenses, and a third is left over for servicing debt.  Just a rough figure and could obviously vary considerably from this, but the book reckoned it was a reasonable rule of thumb…  Similarly for the rental income, they reckoned you should write off about 20% of the income to rental expenses, because lenders will too, hence the 80%.  Again, a very general rule of thumb and not to be taken as gospel, but good enough to start with I thought…

Thanks again Tom, really appreciate it!

Cheers

Hi Tom,

Sorry to labour the point here, but as a novice trying to work some stuff out I just can't get my head around what you and Derek have mentioned regarding the way LOC loans are regarded in terms of affordability calculations.  I hope you can stick with me a little longer and help me out again please…!

It's likely I didn't word my original question on this point very well, so let me try again with an example…

Let's assume this is the situation prior to buying my first IP:

• PPoR value = $500k
• PPoR loan balance = $300k
• Annual repayment on PPoR loan (12 x $2,100) = $25,200
• Annual salary = $150k

At this stage I thought my affordability (via DSR, I know you said lenders use NSR now but I would like to understand this scenario first before I change!) when calculated annually would be:

(annual loan repayments) / ((annual salary x 30%) + (annual rental income x 80%))

$25,200 / $50,000 = 50.4% DSR

Ok so, in preparation for buying my first (of many hopefully!) IP, what I'm trying to work out now is my affordability in future.

I thought I could take out a LoC loan against my PPoR, given the $200k equity and 50.4% DSR – but if I understand your explanation correctly, then there's no way I could…

Proposed IP:

• IP value = $500k
• IP deposit = $100k (funded by LoC on PPoR)
• IP loan balance $400k (forget purchase costs just now for simplicity)
• Annual repayment on PPoR loan (12 x $2,000) = $24,000
• Annual rental income (12 x $2,000) = $24,000

In order to achieve this, there are two steps – first get the LoC, second get the IP mortgage.

To get the LoC, I'm sure the lender will check affordability as well as LVR.  So prior to the LoC my LVR is 60% (300 / 500), and after the LoC it's 80% LVR (300+100 / 500).  All good there.

But if I use what you and Derek suggested (and I'm sure this is where I've misunderstood you), I wouldn't even be able to get that LoC loan, let alone the new IP, due to affordability.  Using the same method as above, it would be:

(annual loan repayments + LoC limit) / ((annual salary x 30%) + (annual rental income x 80%))

($25,200 + $100,000) / $50,000 = 250.4% DSR

If you take the proposed rental income & loan repayments into account from the new IP, it would come down slightly:

($25,200 + $100,000 + $24,000) / ($50,000 + $19,200) = 215.6% DSR

But either way, both DSRs come out way beyond 100% and the application would obviously be rejected.  Surely this is not correct?!?

I would've thought that rather than the whole $100k facility being taken into account, it would just be the annual repayments that would be factored in (if anything, and that's what I was trying to ask initially).

For example, if the annual repayments are around $6k per annum ($100k LoC loan at 6% I/O), wouldn't the calculation be:

(annual loan/LoC repayments) / ((annual salary x 30%) + (annual rental income x 80%))

($25,200 + $6,000 + $24,000) / ($50,000 + $19,200) = 79.8% DSR

This is what I was trying to get at in my first question – essentially I was wondering if the $6k of annual LoC repayments should be included in this equation or not.

Apologies if it wasn't clear – and sorry for the very long worked example, but I hope it helps someone understand better what I'm asking…

Many thanks for taking the time to respond, and hopefully clear this up for me!

Cheers!

Hey Derek,

Thanks for replying!

1 – No worries hopefully someone else can advise on the DSR question.

2 – Cool thanks, I thought that'd be the case.

3 – Sorry by 'term' I meant length of the loan rather than another name for it!!!  As in, is there a standard length of time you take a LOC loan over, so I can work out what the minimum I/O repayments would be?

4 – Surely it'd be the monthly repayments towards the loan they'd take into account for DSR purposes, not the actual LOC limit…?  I thought affordability was eg (30% of monthly salary + 80% of monthly rental income) divided by monthly loan repayments?  If you use the whole amount of the LOC (eg $60k) rather than the monthly repayments (eg $1,500) then you'd never be able to service that debt according to the calculation…  Or am I getting that wrong?

Cheers!

Ah ok, wasn't sure if you meant my whole original post, or some later specific points…

Yes I'm sure my financial professional will help, thanks.

Cool thanks Derek, I've never heard of this – will check it out and see if it applies to us.

Thanks again, much appreciated!

Cheers

Thanks Derek, I am indeed better armed thanks to you and this community – I look forward to discussing further with my advisor now!

Cheers again.

Oops one other thing I thought of but forgot to ask in the last post…

Assume we're at a point where we do have some equity in our house and are going to use $50k to fund the deposit for an IP.  You mentioned taking a line of credit loan – is there an advantage to doing that over simply redrawing the funds?

Cheers!

Ahh ok I see, that makes a bit more sense now – the goal of doing the approach you mentioned is essentially to minimise the mortgage required for the new PPoR whilst maximising the tax advantage (or minimising the disadvantage I guess!)…

We're not dead set on having 3 x $400k properties, that's just a rough idea at the minute – perhaps the best thing we can do is somewhere in between the two options – convert current PPoR to IO, put most of our savings into an offset account, keep pushing as much as we can into the offset for a deposit down the line, and use a line of credit against the equity we have at the moment to get started – maybe one IP now, then another each year or eighteen months if we can do it…  That way we'll have some IPs established by the time we come to move, and we'll still have a significant deposit for our new PPoR.

As mentioned, all of this is just to give me enough info for an informed discussion with my advisor – which we'll be doing soon.

Confused?  Hmmm maybe a little less than I was when I started thanks to your help – but I wouldn't for a second say I'm confident yet that I know what the right approach for us will be in the end – that's why our final decisions will very much depend on our advisor…

Thanks again for all your help Derek!

Hi Derek,

Thank you for the very comprehensive reply – and sorry to all for my post being so long in the first place!

You make some very good points – can I please clarify though…

You suggest we should convert to IO straight away and run an offset account alongside it, but use a line of credit loan to fund any IP purchases (rather than non-deductible cash from the offset account) – but if we do that right now we will have virtually no useable equity, given a value of $470k and mortgage of $430k still…  Therefore we'd have to wait a year or two before we'd increased our equity enough to even get a deposit for a first IP – is that right…?

Also you mention that if we were to redraw from our current PPoR to buy a new PPoR it wouldn't be deductible, but if we were to use cash from the deposit account as mentioned in response 1, wouldn't that be non-deductible too…?

Sorry if these are silly questions – I'm well aware I'm just getting to a point where I have barely enough knowledge to be dangerous, and am keen to understand as fully as I can…

Many thanks!