All Topics / General Property / Bank assessment, question about stress testing

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  • Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 189

    Quick question about Stress testing.

    I understand that when applying for a loan, banks would use a rate that is higher than the actual interest rate to assess your serviceability, such as if the actual lending interest is 4%, banks might internally use 6-7% when analyzing your application, as a way to ensure if the interest rate hikes, you will still be in a position to be able to make repayments.

    However, my question is… will they stress test only the loan you are applying for? Or will they stress test all of your properties in your portfolio which has a loan?

    Say you already have a portfolio of 5 properties and you are buying the 6th, and interest rate is 4%. Will the bank apply 7% testing against your 6th property only? Or will they applying 4% against the other 5 in addition to that 6th property you are buying?

    I am just trying to think for people who have 20 or 30 or more properties, if the bank applies stress testing against all those 20-30 properties in their portfolio, then the amount of “compensation” required to satisfy such stress testing becomes exponential, and unless their income is also increasing exponentially (which won’t happen unless you are talking about business income rather than personal income), then how are those people ever making it past bank assessment?

     

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Many, if not most, will assess existing debts at a rate higher than you are actually paying too.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 189

    What about non-debit related spending? Like food, groceries, etc..

    If my living expense (not loans, etc.. just pure non-debit expense) is 1500 per month, will banks automatically assume it is 500-1000 higher than my actual spending as well?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    yes

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of StevenSteven
    Participant
    @steven1982
    Join Date: 2017
    Post Count: 189

    So in other words, if your spending is like this:

    $1500 for food

    $800 for loan repayment

    Not only will banks add a few on top of the $800 to make your loan repayment look bigger (akin to adding an extra 2-3% on the actual interest rate to stress test your loan), but they will also add some money on top of $1500 for food to make it look like you are eating more than you are actually eating?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Yes

     

    If your living expenses are under the HEM index they will

    a) not believe you, and

    b) bump it up

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

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