I have been dealing with an ever-increasing number of successful property investors who have reached - or even passed - bank lending thresholds. Going back two years the recipe was easy. Use other people’s money to buy property. When the property increases in value, you can leverage the equity gained and start again. Income rarely came into it and many investors made the most of liberal low-doc products.
In contrast, income today (and in particularly non-investment property income) is a major factor. From a servicing perspective, the banks will allow us to include 75% of rents and will charge the mortgage at 8% principal and interest over 30 years. Banks further reduce any perceived benefit by not allowing us to use special tax codes in their servicing calculations. (Fair enough given that these could disappear – if tax rules were to change – and so cannot be relied upon for servicing.)
The example below shows a typical investor who has a portfolio with medium yields (nothing spectacular.)
- The loan-to-value ratio is only 57% so would be an easy deal.
- Even though the client has locked in some great long-term fixed rates, bank servicing calculations (8% P&I and only including 75% of rents) make the deal cash-flow negative.
- 51% of the client’s income comes from property. This will set off some alarm bells at the bank. (The client will definitely end up in business banking, which is less than ideal to say the least.)
- The bank won’t recognise the benefit of any special tax codes
This client will be declined by the bank for any new lending (18 months ago it would have passed) and yet the client will be feeling in pretty good shape with positive cash flow of $3,600 per month. The bank views them as having -$1,200 per month.
The rules have changed
Because you now face tight borrowing constraints, you need to critically re-evaluate every property in your portfolio. Yield has become more important. To keep growing your property portfolio, you will need to diversify your income sources. For some people that means buying a business. There are a number of investors looking for good cash-flow businesses to complement their property investments. Syndication and partnerships are other options. You could for example bring in a business partner with high PAYE income. The new rules mean that most property investors will need to think outside the square in one way or another – you can’t waltz up to the bank with what you think is a good deal and expect it all to go your way. Talk to the team at Squirrel and we can help you work with the banks’ new criteria.
View our Fair Dealing Policy, including procedures which must be met before a borrower can become a member of our platform.