20 Jun A question of borrowing power – Andrew Mirams
Andrew Mirams answers a question from Jie about affordability and serviceability and the gap that is emerging.
Kevin: I want to answer a question. It’s a rather long e-mail that came to me, and I won’t read it because there’s a lot of personal information inside it, but I want to thank – I hope I pronounce this correctly – Jie Zhao. Jie, thank you for your e-mail. It deals with “Look, I believe I have enough servicing ability. I have a couple of loans, a principal place of residence and one investment property. I want to go and buy another one, but the banks are saying no.”
Let’s have a look into this as to why it is. I’ve shared all of your information with Andrew Mirams.
Andrew, I don’t want to go into the details behind this because there’s a lot of personal information in there, but why is Jie having so much trouble?
Andrew: Hi, Kevin. It’s a great question, it’s one that’s happening quite a lot at the moment. It really comes down to client’s affordability versus the bank’s serviceability, and the ratio is quite wide at the moment because we have all-time record low interest rates. So people, what their actual expense is and what it’s costing them to hold and maintain their properties, a lot of them are paying for themselves or neutrally geared, versus what the banks are now being forced to do from the middle of 2015, when APRA enforced some changes upon them and they had to tight up a lot of their servicing rates and things like that.
Kevin: Just before we go any further, I might just qualify that with Jie – I’ll paint the picture – he’s on a good salary, he has a principal place of residence, has a fair bit of equity in that, and from what he’s saying to us in the e-mail, a positively geared investment property, seems to have sufficient savings as well to go and buy another property. So it mystifies me.
When I look at these figures, I think “Gee, this guy certainly should qualify for a loan.”
Andrew: Yes, that’s what we’re saying. There are a couple of things with this. So there’s a home loan, and there’s a good portion of that offset. Clients say – let’s say they have a $200,000 home loan and $100,000 in offset – “Oh, I’ve only got a $100,000 home loan.”
The first thing you need to know is, that is cash. Cash can be taken out at any given stage, so the banks actually assess on the actual debt they have, irrespective of any offset balance. That’s the first point.
The second point is while an investment property is being maintained in the fours – I think everyone is pretty much paying 4%, whether it’s a high or a low 4%, and depending on where the property is, you’re probably getting a yield somewhere around that – certainly, from a tax perspective, it is probably, like I said, largely paying for itself. However, the banks are still servicing, and even though rates are coming down, their servicing rates are being held at where they are.
The bank servicing rates are – I’ll say – an average of about 7.5%. There are some at the higher range, near enough 8%, there are some slightly lower in the low sevens, but let’s say an average of 7.5%.
So if all of a sudden you added in all your debts and you service it at 7.5%… And then the other thing that people don’t understand is that it needs to be repaid, so if they have it on interest-only, which is their affordability because it’s not costing as much to hold, the banks are now looking at it principal and interest over the remaining term.
When you add all those things together, that’s what’s really hurting a lot of our clients in that same thing: the affordability versus the assessability or the serviceability.
Kevin: Serviceability. Knowing what you know about Jie’s particular situation – I’ve sent everything to you, all the facts and figures – if you were talking to him, would you be able to help him? In other words, would you be able to reconfigure his loans?
Andrew: I think there are some things you could do that would certainly make him more attractive to a lender. I’m always reluctant to say, yes, we can do something without knowing everything. I think that’s a little bit naïve, etc.
Is there something that can be done? Potentially. There’s always something that can be done, and if the timing isn’t right, sometimes doing nothing is actually the right thing to do. But yes, I’d be more than happy to look at Jie’s situation and see if there’s a way. I do see some opportunities and some ways to restructuring here, but without all the information, I’d be reluctant to say yes, we can definitely do something, because I don’t want to let him down, either.
Kevin: No. Well, I’m going to communicate with Jie off-air, but Jie, publically I’ll just put the call out to you. If you want to make contact with Andrew Mirams or anyone of his team from Intuitive Finance, you can do that by using the link on Real Estate Talk. Go and check out Andrew’s and the Intuitive Finance featured channel on our site, as well. Lots of great information there for you.
Jie, I’ll leave that with you.
Andrew, thank you very much for your time, and thank you for helping Jie with that situation.
Andrew: My pleasure, Kevin. Thank you.