Does any one know the formula(es) the banks use to assess this?
I am assuming it is something like this.
1) Equity, minimum required in overall portfolio is 20% (without LMI). With LMI can go down to 5%
2) Serviceability. Take current interest rate, add 2%. Look at total debt,
multiply by adjusted interest rate. This number must be less than 75% of
your gross income. (I think the banks are counting my casual income as ZERO,
but are including our rents). I think there may also be a cost of living
amount that they set aside for you to live off.If anyone has run into the financial brick wall and can shed any light on what the limits are it would be most appreciated!!
Hi Wobbly
Unforfortunately no 1 formula fits all.
You have missed off credit scoring which if often used where the lvr is over 80%, sensitised rate is applied to the SVR rather than the rate you are being charged although with some lenders they take other comittments at payable rate rather than sensitising the committment.
Then you have rental income which can be anything from Nil to 100% depending on a variety of factors.
Of yes Living Allowance slightly varies with all lenders depending which edition of the HPI they use.
C/C anything from Nil to 3%.
Did you want to go fixed or variable. With fixed it is often the rate charged which is the servicing rate.
Oh i could go on and on.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I would go variable as we get a good discount off the rate. Surely someone can give us an idea.
As i say the rate is neither here nor there.
The amount you can borrow (and that was what your question was originally) will depend on 101 criteria as i outlined above.
The actual chargeable Interest rate means nothing.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I would say Richard is spot on here.
But if you want a more detailed answer here goes.
Acceptable existing income*
Plus acceptable proposed income**
less tax***
Plus neg gearing add-backs****
less living expenses*****
less repayments on existing loans******
less repayments on new loans******** some lenders don’t accept some forms of income (e.g. casual).
In some cases only a % of these forms of income can be used.
Some lenders require income to be evident for a specific time before being deemed acceptable income.** proposed rental income can be used. Usually at 80%.
This can be proven by valuation, lease, agents letter etc.*** you can work out tax on an ATO calculator which would be accurate. Some lenders allow for Medicare rebate where others do not.
**** after taking 80% rental of income, less propossed interest deductions (use actual not sensitized rate) you might have a loss. Go back to the ATO calculator and work out the difference on total income versus proposed net income. Add back the tax difference. This will only apply with lenders that allow deductible interest caclulations.
***** living allowance is generally based on a published poverty index however varies between lenders.
****** some lenders use actual rate. Some use sensitized rate. Lines of credit and IO loans generally assessed over 25 years. Credit cards calculates at a % of the limit.
******* generally a higher rate used. Try 1.5% above. Don’t count the IO term e.g. If 30 years with 5 yes IO reverting to 25 PI – work off 25 years PI
In a bizarre way the banks actually come out pretty close to each other if working on the same figures. If there is a large variance it is usually due to one lender forgetting about your kids or not declaring an existing loan or credit card.
Best option is to go see a bank manager or two plus a broker. Take your numbers and get them to show you how their spreadsheet works. Most can be worked out via the banks excel spreadsheet without an application needing to be lodged.
Most lenders will be happy to go through these calcs with you as you are a potential client.
No point in trying to manually work out your capacity unless you have in depth knowledge of bank policy.
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