All Topics / Finance / Increasing borrowing power through higher income formulae

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  • Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Hello everyone and thanks for your help with everything so far.

    So, there I was running calculations for buying positive geared property (once I’d worked out how I wanted to do it) and I thought the return on investment was ok but not worth the rave that everyone was giving it until I ran a borrowing calculator with the increased income. Holy cow, it seemed that for every $5000 more income p.a. I was looking at anywhere between $60,000 and $75,000 more borrowing power. Is this right? Roughly speaking?

    Is there a formula? I know for credit card limits it is something like card limit x 5 to reduce, is it the same for income x 12? Does anyone know? This for me may be a bit soon, but it’s the best argument for positive cash flow yet. $5000 a year mor is nice but nothing to get so excited about, but being able to borrow so much more is. I’ve been wanting to subdivide property but the outlay is pretty high, I’d be hitting my borrowing ceiling, this however is very exciting.

    Anyone already familiar with all of this?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi WTR,
    Well done – you are obviously giving this a lot of thought and effort. I recall doing similar figures when starting out – it all helped me to go into my first deal with confidence.

    I am not sure if your $60k to $75k is correct (these numbers are different in this day and age from when I started – e.g. WAY lower Interest Rates today) but certainly, it is worth doing the numbers as you have done. Just a couple of cautionary points to add here though:-

    1. Some Banks won’t lend up to a full 100% of Rental Income, so be ready for that. One of our excellent MB’s could give you chapter and verse on this side of things – just allow for that possibility for now.

    2. At some point, Banks will refuse further lending to you because “..you are too rent reliant!” (Um, it is a bit like saying a shop is too reliant on their regular customers, isn’t it?). Again, a MB will be able to guide you re this too.

    Meanwhile, keep on searching – these little gems still sparkle, even though their lustre might be dulled a little !! Great find, and good hunting,

    Benny

    Profile photo of BuyersAgentBuyersAgent
    Participant
    @knightm
    Join Date: 2005
    Post Count: 338

    The brokers can comment on specifics re which lenders treat extra rental income more generously, as they do vary. However all extra income improves serviceability. As investors we generally hit a ceiling in 1 of 2 ways. We either hit the servicing ceiling or the deposit ceiling (we max out our dsr or our lvr) when either one stops you its frustrating. If you have deposit money or equity available but are told you can’t service then yes, the simple formula is that making more cashflow (either from high yielding property, or from a pay rise, second job, extra small business etc etc) is the solution. The banks have formulas for living costs so when you earn more $ above this the increased borrowing is quite dramatic per $ earned.

    BuyersAgent | Precium
    http://www.precium.com.au
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    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Well thanks very much everyone,

    Good to hear I’m walking in the footsteps of successful people before me.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    In the main lenders take 3% of the card limit as an expense each month so reducing the limit certainly increases your borrowing capacity.

    Some lenders will ignore the C/c expense if you can show over a period of 2-3 months that the monthly expense has been paid within the due date.

    Hope this helps.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of Kinnon BellKinnon Bell
    Participant
    @kinnon
    Join Date: 2014
    Post Count: 151

    Unfortunately there’s no real hard and fast rule or formula as far as that goes as each bank has different policies on how they treat all the variants that contribute to your borrowing capacity.
    Some of the main variants are:
    Debt – taken at actual repayments or with pre-determined buffer or repayment rate
    Rental income – full amount or % of rent received
    Other income – is it acceptable ie overtime, bonuses or commission or centrelink payments

    Too many variables to say a x b = c. Would be lovely if that were the case though.

    Kinnon Bell | Kinetic Funding
    http://www.kineticfunding.com.au
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    Mortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Thanks for your help everyone. I emailed my broker about having my cake and eating it too. We will see what he says.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi walking to run

    Generally speaking – a positive cashflow investment will do more good than harm for your borrowing capacity.

    However – banks will use different methods of calculating max borrowing so there’s no real set rule in terms of how much your borrowing capacity will improve when the rental income is increased by a certain amount.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Redom SyedRedom Syed
    Participant
    @redom
    Join Date: 2014
    Post Count: 18

    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 6 years ago by Profile photo of Redom Syed Redom Syed. Reason: More precise numbers. :)

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

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Very helpful redom thanks. Yes Helen collier kogtevs makes this point about credit cards. People are stupid enough to hold them blank. People also misuse them. I used to, but I have a $1000 limit card I keep. $5000 is unlikely to make or break a deal.

    Other things I’ve learnt are fixing a loan for 3 years reduces the bank’s buffer zone when assessing.

    From what you’ve said though, it seems $1000 income helps more than $1000 debit hurts. It’s not evenly balanced. That’s a bit funny. Sorta like the bank expects you to have some credit cards so they’re a bit lenient. Kinda like that stupid friend you have who says dumb stuff all the time but you forgive easier because you just accept them that way.

    Mathematically is have expected it to be more even, but i suppose there are other safety factors in place.

    Personally, kill me I know, I still think pos cashflow is pretty expensive for roi, I could be better off setting up a shop on eBay and profiting $5000 a year. Depends on time and ability I suppose, or would that second income have another assessment that worked funny?

    Great help thanks everyone.

    Profile photo of Redom SyedRedom Syed
    Participant
    @redom
    Join Date: 2014
    Post Count: 18

    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

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

    Profile photo of Redom SyedRedom Syed
    Participant
    @redom
    Join Date: 2014
    Post Count: 18

    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).

    Redom Syed | Confidence Finance
    http://www.confidencefinance.com.au/
    Email Me | Phone Me

    Home Loan Specialists based in Sydney, serving clients Oz wide.

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Thought I’d bring this back.

    If rent is at 80%

    What is likely for second provate business. Like say I start a hire company and make $10,000 per year and keep my main job. Is that $10,000 assessed similar to my main employee job or is it like so many business owners who struggle for loans.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    WTR all depends on the longevity of the second job.

    If you have been doing it a while and have 2 years Tax Returns then should be able to take it as additional income.

    Cheers

    Yours in Finance
    0-40 properties in a decade. Ask me how.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Walking to run
    Participant
    @alisdair-horgen
    Join Date: 2014
    Post Count: 68

    Thanks Richard that’s enough to go on

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