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February 17, 2015 - 12:05 pm

Its not that normal, but does happen depending on the situation. If he’s likely to be clawed back he may charge a fee for service (ie if your developing to sell in short periods).

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February 12, 2015 - 8:04 pm

Your financing options of the top of my head:
1. Higher LVR loan – LMI works on an exponential like scale at high LVRs, so this will need to be considered.
2. Parental Guarantor if your parents have equity available that your willing to use. This way you could borrow 105% of the property.
3. Gifted funds (parents borrow their equity, gift it to you).
4. If your close and have strong servicing, personal loan the closing costs/down to 80%.
5. Lenders that goes to 85% no LMI.

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February 12, 2015 - 8:01 pm

Hmm given the doubts, id steer clear away from this.

Cheers,
Redom

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December 30, 2014 - 4:11 pm

Interest rates are one of the largest factors that influence prices in the short term. By adjusting rates one way or another, the RBA can effectively manufacture a growth cycle or put a stop to one.

Why? Interest rates are effectively the price you pay for credit.

Because people need credit to buy houses. Without credit, there would be next to no demand (imagine if everyone had to pay cash). Therefore when the interest rate rises, the price of credit rises. When the price of credit rises, the demand for housing falls.

Cheers,
Redom

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December 30, 2014 - 4:08 pm

Think of it as a risk mitigation tool.

One of the biggest risks to cash flow for investors is interest rate risk. Fixing rates over different periods can manage this risk.

In terms of pricing, fixed rate market is very competitive at the moment. Years of cheap money around the world are flowing through to lower funding costs. Often people confuse the ‘fixed rate’ price as some sort of educated guess by the banks as to where rates will be in a few years time – its not.

It reflects the funding costs in longer term funding, which are largely driven by international credit markets. The worlds massive players have all gone through very large monetary easing that has pushed down credit prices (US QE, Europe and Japan monetary easing). How long that continues is debateable and very difficult to predict (1 year, 2 years, 5 years).

Cheers,
Redom

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December 24, 2014 - 12:21 pm

Yep that’s how to set it up to avoid x-coll. :)

A few tips to maximise the structure your employing – it may make sense to:
a) get a couple vals done on your PPOR – often their are variances in valuations. May make sense to use the highest val.
b) If possible and suits you: turn your PPOR to I/O too – by reducing your contractual repayments, this will increase your borrowing power moving forward.
c) pay your stamp duty/other costs using borrowed funds. Therefore your total new borrowed funds should be 360k + closing costs. Take out 90k from your PPOR (up to 80% LVR), and then take out a loan for 80% of the new Investment. Put remaining ‘borrowed equity’ in the offset for future use.

Cheers,
Redom

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December 23, 2014 - 9:09 pm

I should note what others have said too – servicing calculators vary between lenders. The above are just some ‘soft’ rules to think about it.

Its gets technical, but brokers generally navigate around servicing calcs to build plans/borrow as much as possible. Brokers generally use a few tricks to make an applicants file look strong…but can only do so much with a given income (hence income rises are very powerful).

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December 23, 2014 - 9:02 pm

3 year fixed reduces banks buffer zone? The buffer zone banks use to assess is the same regardless of what type of rate you have.

When you go and apply for a loan, banks will generally do an income/expenses test and want to see that your income > expenses.

Generally, banks calculate the expense for the new home loan at 7%+, P&I repayments – even if you only pay 4.6% at I/O. However, for existing debts that you already have, some lenders assess this type of debt at what you actually pay (4.6% at I/O). Therefore, if you fix your EXISTING debt at a lower rate, and go to a different lender, your likely to have increased your borrowing capacity.

In terms of whether increasing your income or decreasing your expenses is more powerful as a method to increase your borrowing capacity – this will depend on the type of income/expense it is. For example, increasing your gross salary by $10000 isn’t as powerful (because its taxed) as decreasing your ‘discretionary expenses’ (e.g. foxtel, etc) by $10,000.

The reason why i say increasing income is very powerful – is one can reduce their expenses only so far, whereas income rises are potentially infinite.

Cheers,
Redom

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December 23, 2014 - 6:19 pm

Heya,

Good question. Brokers spend every day playing with these calculators. A few observations:

Adding income is the most powerful way to improve your borrowing capacity – other techniques (e.g. interest only, reducing bad debt, switching lenders) generally only help to ‘maximise’ to get you as much as possible for a given income.

Increasing income increases what is possible. The overall effect on your borrowing capacity will depend partly on what type of income it is. As Benny mentioned, rental income is generally discounted by 80% (to take into account other property costs).

In terms of salary gains, a $10,000 gain for the average income earner, will potentially increase their borrowing capacity around $80,000. Some quick math, a $10,000 gross income gain is about a $6,300 gain in net income p.a. This can service (at banks assessment rates of around 7%), around $80,000 in additional debt.*

* assuming all other factors remain unchanged.

In terms of credit card debt, the ‘rough rule’ is your credit limit will reduce your borrowing power by about 5x its limit. Breaking it down, banks roughly assess credit card limits at 36% p.a . Therefore a $10,000 credit facility increases your ‘expenses’ by about $3,600 p.a. This is equivalent to around a $50,000 decrease in your borrowing capacity.

Hope this helps. :)

Cheers,
Redom

• This reply was modified 9 years, 4 months ago by  Redom Syed. Reason: More precise numbers. :)

Redom Syed | Confidence Finance
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December 22, 2014 - 2:10 pm

Kinnon – I love that video!!! Watched it plenty of times. Thanks for sharing. :)

To OP – the question you’ve raised is awesome. I find it fascinating, and there’s a deep literature trying to understand it.

As others have said, learning how to make money is likely to yield you more fruit than learning how money works. Nonetheless, it is a very good starting point.

One key takeaway to remember is ‘supply and demand’. With housing, prices will rise over the medium term when demand is greater than the supply of stock. One of the biggest drivers of demand is interest rates. In recent times, in Sydney, on the back of low rates, demand has grown stronger than the supply of properties available – and there has been a price acceleration as a result.

Regarding the exchange rate, it is like any other market, works on supply and demand. It is a little bit complex in understanding what drives supply and demand in this market though. The factors that influence demand and supply are international as well as domestic. As Australia is a ‘small, open economy’, our exchange rate is largely driven by external influences.

Cheers,
Redom

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December 10, 2014 - 4:34 pm

Fair point Plummer. You could get 10-12 year fixes too though. To be honest i haven’t heard much about the mentioned strategy before. Would love to hear more from you and others. :)

Perhaps investing in asset classes that move in the opposite direction to economic conditions? I’m not too aware of this but: gold, gambling stocks, alcohol stocks?

Cheers,
Redom

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December 10, 2014 - 10:14 am

Good to see someone thinking about risk management – very important, particularly in the middle of a boom.

Fixing interest rates on parts of your portfolio is a quick trick. Doing so, allows you to ride out a period and adjust your lifestyle/finances accordingly.

Cheers,
Redom

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December 6, 2014 - 5:14 pm

Hi NannyC – Kinnon’s definitely the expert on the Cairns market with a wealth of valuable inside knowledge.

Regarding Brissy – it does seem ‘primed’ for growth. Investors are flocking there away from Sydney. With next to no growth over an extended period, it really does seem to be the ‘market’ to be in.

Note that Brissy doesn’t quite have the supply side issues Sydney does – so the ‘pace’ of growth may be unlikely to match Sydney’s heights.

If you dig around these forums and SS, you’ll see lots of valuable info on the Brissy/Cairns markets.

Cheers,
Redom

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December 6, 2014 - 5:04 pm

Alternatively, you could use the equity available (assuming 80% lends, around 160k) to fund your first couple house deposits. Then use your cash to go again, rather than ‘wait’ for equity gains – just because it doesn’t receive the same tax deduction, it doesn’t mean its not still very viable to purchase property.

Realistically, using 100k of borrowed equity to fund deposits to purchase houses will increase your interest deductions by about $5000 per year – in $$$ terms, that’s about a $1500-2500 refund per year. Sure, it does make a difference, but in isolation, its generally not big enough to be a make or break factor in your purchasing decision. Particularly if the market is moving – $2000 is a very small market movement (<1%).

I serve a lot of younger ‘income rich, cash rich’ clients that have pretty decent funds available to invest, without much equity (which is generally built up by time in the market) – they’ve invested with CASH and made significant returns. As their portfolio matures, they probably wont need to use cash anymore. But early on, its helped.

Cheers,
Redom

Cheers,
Redom

Redom Syed | Confidence Finance
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December 6, 2014 - 4:57 pm

Heya,

Just be aware they are assumptions and forecasts being used – any investment carries risk.

Some of the calculation assumptions are nice to see, particularly the conservatism applied with the interest rate.

The capital growth rate is quite high – perhaps using previous 20-30 year price cycle dynamics to calculate todays price. Realistically though, if the average buyer had bought a newish place in Brissy 5-6 years ago, those cap growth numbers would be all wrong (7% p.a. is a 50% rise in asset prices over 6 years) – whereas the median growth rate according to RpData|ABS is somewhere floating around -1% to 1% over the time period.

Cheers,
Redom

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December 5, 2014 - 2:00 pm

Give precium a call – pretty sure his the expert in this region.

Northern Beaches is a tough market to crack and has expanded quite rapidly over the past 24 months – it’s not a bad idea to look elsewhere. Lots of investors are moving up to Brissy in their search.

Cheers,
Redom

Redom Syed | Confidence Finance
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December 5, 2014 - 11:18 am

Hi eyelove,

You should be able to access equity in existing property – as others have said, just set it up as a split loan to separate deductible and non deductible debt.

By the sounds of it you’re having serviceability issues (borrow cap). You could go to two separate lenders for the equity release of your existing property and your new property. By doing so, you may be able to increase your borrowing power and get over the hurdle.

If you’re going to the same bank and they’re only offering your 283k, its unlikely they’ll give you any more from your existing property.

By splitting the two lenders, you can benefit by going to a more generous lender who is willing to offer you the cash.

Cheers,
Redom

Redom Syed | Confidence Finance
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December 4, 2014 - 9:50 pm

Heya,

RPI has quite the rep on investor forums. :)

Personally, I’ve used Rod Johanson recently – Johanson Lawyers. Been excellent for my QLD purchase. :)

Cheers,
Redom

Redom Syed | Confidence Finance
http://www.confidencefinance.com.au/
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Home Loan Specialists based in Sydney, serving clients Oz wide.