Forums / Getting Technical / Finance / The best way to work out borrowing capacity

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  • Profile photo of gus123gus123
    Participant
    @gus123
    Join Date: 2012
    Post Count: 11

    Hi all,

    Just wondering if anyone had any idea how I can get an accurate idea on borrowing capacity. I’ve tried some of the online calculators but the results don’t seem very accurate or reliable. I have a reasonable amount of equity but my hurdle is income tests at the current time.

    My finances at a glance are…I earn $71k gross and my partner earns around $26-27k (self employed) and we have two kids. Our current home value is $800-850k and loan value of near enough $500k. I would hope to be financing some time at the end of the year at which time I will have around $30k cash for the project but my hopes are to load the investment property with the debt and keep whatever I can for some form of value adding in the medium term.

    Any advice would be greatly appreciated.

    Cheers.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,915

    Hi Gus

    Quick summary for you:

    Income – Add together the net annual income of both of you after deduction of income tax, medicare etc.

    Add in say 80% of the anticipated gross rental income for the new investment property.

    Expenses – Work out the principal & interest repayment of your existing 500K and the new investment loan at a rate of say 7.25% on an annualised basis.

    Deduct – $3200 x 12 as an Annualised living expense.

    If you have a cash surplus then likely to be good to go.
    If not then reduce the numbers accordingly.

    Course assumed no credit card, personal loan etc.

    Not perfect but a good guide.

    Cheers

    Yours in Finance

    Richard Taylor | Helping investors pay down their debts thru a Mortgage Trust investment
    http://www.australiansecurecapital.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $26M. Ask me for a copy of my API Interview.

    Profile photo of gus123gus123
    Participant
    @gus123
    Join Date: 2012
    Post Count: 11

    Thanks Richard, very helpful.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 921

    In reality Gus it’s best to speak with a broker so they can run your figures through the exact lender calculators. Richard’s given you a rough example of one of the types of calculators some lenders use – but in reality most lenders calculators will have 40-100 variables.

    Anything else is going to be inaccurate to the point of useless.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of gus123gus123
    Participant
    @gus123
    Join Date: 2012
    Post Count: 11

    Thanks Corey,

    I’m really trying to figure out a ball park figure, ultimately it will depend on the property but I’m not really sure where to look until I have some idea if my potential to borrow. The info Richard has provided is exactly what I was after at this point.

    Cheers.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 921

    You’ll find that it won’t be in the ballmark however – as FYI some of those variables can be tweaked slightly between lenders which will change your capacity by upwards of 2-300%. Basically trying to just do an excel function calculation is going to give you something which is guaranteed to be unreliable to the point of useless.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of gus123gus123
    Participant
    @gus123
    Join Date: 2012
    Post Count: 11

    Really? I can entirely accept that may be the case, and evidently is, but how do you approach the market as an investor if you cant work out your capacity? Do you just put in an offer and work out if the banks will lend later?

    It may seem like a stupid question, but my experience is purely owner occupier so its all a bit different.

    I can very easily set up a budget and work out my capacity for repayments but that means nothing to banks and their lending criteria.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,915

    Gus,

    Remember when you buy an IP there are a number of variables in regards to potential rental income, percentage of rent considered, name you buy it in for deductible interest etc etc.

    Regretfully each decision has a bearing on the amount you can borrow let alone the other variables.

    Not the same as a PPOR purchase.

    Cheers

    Yours in Finance

    Richard Taylor | Helping investors pay down their debts thru a Mortgage Trust investment
    http://www.australiansecurecapital.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $26M. Ask me for a copy of my API Interview.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 921

    Really? I can entirely accept that may be the case, and evidently is, but how do you approach the market as an investor if you cant work out your capacity? Do you just put in an offer and work out if the banks will lend later?
    It may seem like a stupid question, but my experience is purely owner occupier so its all a bit different.
    I can very easily set up a budget and work out my capacity for repayments but that means nothing to banks and their lending criteria.

    You speak with an investment focused finance strategist PRIOR to looking at any properties or making any offers.

    That’s their job, you don’t go in blind and you don’t DIY if you want to have results which don’t have you chewing your nails and pulling your hair out for no benefit.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,168

    Hi Gus,
    Richard and Corey have already provided guidance for you. And either of them would be a great choice should you wish to get a better focus on YOUR options. As an investor, those options are paramount in arriving at “What is best for YOU” – so do make use of those whose role in life is to guide you along the best path (or even through the minefield…. it can be like that at times too).

    In short, always get your finance sorted before you even start to look for properties. No use going looking only to find out later that you can’t afford the great buy you have chosen. Or worse, to set up something financial, only to discover years later that you set things up poorly, and the result limits your future investing severely.

    Also, Mortgage Brokers are paid buy the banks they recommend, so there is usually no charge to you for their services. Of course, confirm this with them when enquiring about their services as there can be exceptions.

    As they indicate, there is SO MUCH MORE to be considered as an investor than as a home buyer. And these people will give you the best grounding for everything financial.

    Benny

    PS When starting out, meeting face-to-face can be important for some. It is an individual thing. If you wanted to meet a Mortgage Broker “face to face”, this thread might be of some help:-
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/page/2/#post-5031494

    Profile photo of gus123gus123
    Participant
    @gus123
    Join Date: 2012
    Post Count: 11

    Great responses, thanks for the time taken guys.

    As stated earlier I have dealt with MB’s before but purely in a owner occupier mindset. I would have assumed that strategy and the properties you buy has an impact, but I have clearly underestimated how much of an impact, all part of learning I guess.

    Again, thanks for the responses.

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