Seeking debt servicing clarification

Rule of thumb with most lenders:

Net monthly income + 80% of Gross Rent

Less

* Living Expenses assessed (dependent on the size of family. Lenders use a minimum of their own preset scale or your declared amount whichever is higher).
* 3% of Credit card limit.
* Existing Personal Loan repayments.
* Existing loans based on a P & I loan at a rate of say 7.25% (Going to be a lot higher than you might actually be paying on an interest only basis at say 4.5%).

= net monthly surplus

Divide by P & I factor at say 7.25%

This will give you a borrowing amount.

Cheers

Yours in Finance

To elaborate on what Richard said, although a property could be positively geared, the banks may treat it as negatively geared by assuming the actual interest rate is higher and/or adding a buffer (20% for example on top of your actual payments) and/or that you are paying P&I although you are only paying IO and/or take only 65-80% of the rent into account as your income.

Why are they doing all this? To stress test the borrowers ahead of giving them the loan.

If, however, you jump through all these hoops, adding positively geared properties should increase your borrowing power (although then some lenders bring other factors to the equations, such as wanting more net available income and/or calculating the rents at only 6% yield etc. yeah, lots of fun 😂 Which means to me that having a good broker on your team is probably more important today than ever before).

Hope this helps?

Cheers,
Ethan

Hey FXD,

Yes, having lots of money always helps 😂

As a side note, I always calculate gearing on 100% of the costs, regardless of the LVR, because my money could work somewhere else instead (for example, offset another mortgage).

The lender will look at your salary and at the rental of the existing and new properties. They will take into account 100% of your salary but only part of the rental. This is for prime and for low doc. The more income you show, the better, it’s just that not all of it is recognised (for example, some lenders recognise 100% of commissions, others only 80% etc).

Buying via a company (so that the company gets the rental money) has its own extra costs AND if your payslips are from a company you own, the lender will want financial reports of that company and will discover that the income is derived from rental. That’s not the way I would go.

The experts to talk to about such matters are finance/mortgage brokers. Situations like yours are perhaps the main benefit we bring to the table. I would suggest considering a broker that walks the talk, i. e. an investor as well. It helps when they know first hand what you’re talking about, I reckon 😎

Hope this helps?

Cheers,
Ethan

No lender will lend baeed on rental income only where the NCCP applies as it would be a breach of the act.

Actually I am not sure. I think the NCCP may apply to any natural person borrower.