How does rent received affect loan serviceability? I believe that as a rule of thumb banks will allow you to pay up to 30% of your gross income in loan interest. If I buy an investment property will 30% of the rent contribute to loan serviceability? Would this be net or gross rent? Thanks Cathy
Hi Cathy
Lenders generally take into consideration 75% to 80% of the rental income received when assessing serviceability.
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]
Hi Cathy
Hate to say under NCCP it is not as simple as that and there are too many variable to list
As Jamie mentioned some lenders will take between 75 – 80% of the potential rental income into consideration others will take between 0-100%. Some lenders use a sensitised rate (so assume you are paying 7% they might add on a margin and work out the payments assuming you are paying 8.5%- 9%) others do not.
This can also vary if you are taking out a fixed rate.
Credit cards can be assessed from everything for zero per month to 3% of the balance.
Living allowances are normally taken from the Henderson Poverty Index but you would be suprised how the scale varies depending on what update a lender is using.
All in all there is no simple formula for calculation.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thank you
Taking a simplified example suppose I earn $100,000 gross and the bank charges 8% interest and will allow me to pay 30% of my income as interest. Then it should lend me up to $375,000 (30% of $100,000 = $30,000 = 8% of $375,000).
If I then add a rental property earning $200 per week and the bank will take into consideration 75% of the rent .
What will my total borrowing capacity be?(1) total income now considered $100,000 plus $7800 (75% of $200 times 52 weeks). borrowing capacity $404250 (30% of $107800= $32340= 8% of $404250)
or
(2) 75% of rent $7800- all of which can service debt of $97500 (8% of $97500 = $7800). Total borrowing capacity $375000 (from work earnings) plus $97500 (from rental income) = $472500
I realize banks take more into consideration but at the moment I’m just trying to understand the very basics.
Thanks
Cathy
Hi Cathy,
Using a percentage of income for interest is not going to get you an accurate picture of borrowing capacity. Living expenses are calculated independently of income (using a margin over the Henderson Poverty Line, as Richard stated). Because of this you can use a lot higher % of income if you earn more. I suggest you get yourself a broker and get them to send you a sample of a lenders servicing calculator if this really interests you.
Regards
AlistairThank you. I’ll have a chat to a broker.
Yep, Alistair beat me to it. There’s just so many variables at play, seeing a good independent mortgage broker (particularly one that works with investors) will make life easier.
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]
I'd love to have a copy of a lenders servicability calculator. In particular for CBA.
If anyone can help, that would be appreciated.
Separately:- currently all my loans are interest only (for the first 5 years, and then P+I). However i have been advised that for the servicability calculation, this is calculated as though i have progressed into the P+I phase for each of these loans. This is significant. The explanation being that you need to pay it back at some stage!! – i had thought to keep renewing as interest only when required. Then pay back on sale.
– Paying back 4k per year, per 100,000 borrowed, for 25 years is a big dent against what i could borrow.Comments?
Hi Wobbly
Different lenders have different methods for calculating serviceability.From the description above, it sounds like your loans are probably with CBA. There are some lenders that only stress test the loan you’re taking out with them by adding a couple of percent to the interest rate but they don’t load up the other loans you have with other institutions (which can be handy for serviceability). Feel free to shoot me an email if you’d like a second opinion on your current serviceability and loan structure.
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]
Hi Cathy G.
You could have a play around with ones like this one to get a general idea, but as has already been mentioned lenders have their own 'weird & wonderful' criteria for servicability.
http://genworth.com.au/lenderresourcecentre/ToolsandResources/servicingcalculator/index.htm
Lenders mortgage insurers like QBE & Genworth could be considered a bit 'harsher' than some lenders, but it may assist as a guide. You'll notice the cost of living figures on this one as an example. Since the new credit laws this year, many lenders prefer you to state your living expenses, and if higher than there 'suggested ones' as the other guys have mentioned, will use those higher figures in their servicing calculations.All the best
Thank you v8ghia. I have had a look at the tool and it should be great as a starting guide.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
