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  1. #101

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    Just wondering - is there a risk of being reclassified by a bank from a retail borrower to a business borrower with the recent changes in APRA lending guidelines (given that the big 4 banks in NZ are owned by Australian banks and would apply APRA guidelines)? Especially with split banking and the recent APRA guidelines where the banks are expected to enquire about all your outstanding debt. Once one bank knows about all your borrowings including those with other banks, then the total amount of borrowing may deem them to reclassify you as a business borrower and be subject to business borrower terms.

    I hear that business banking loan terms are more onerous than for retail borrowers. I recall reading in Matt Gilligan's book about a borrower who was reclassified by a bank from a retail borrower to a business / commercial borrower during the GFC. The bank then reduced their LVR from 70% to 60%, then reassessed the borrower's asset values which resulted in the borrower being required to inject capital or start selling to reduce their mortgages. Given current LVR rules for retail borrowers at 60% and commercial borrowers at 60% LVR, the retail customer is at the same 60% LVR as a commercial customer so it is not an issue if the investor is reclassified as a business borrower by the bank. If the customer is classified as a business borrower, then they may be subject to interest coverage ratios of 1.5-2.0x and not sure if the reclassified borrower would meet this additional debt servicing criteria.

    On the other hand if the customer continues to remain classified as a retail borrower by the bank and if the complete debt picture shows that the borrower is unable to meet the debt servicing rules (total debt on 25 year P&I at 7-7.5%), in order to maintain interest only terms, then the bank may make the borrower go P&I - which would likely mean a substantial increase in monthly payments from their current interest only payments.


    Here is relevant clause from the recently finalised lending guidelines from APRA (note that ADI is authorised depository institution - i.e a bank regulated by APRA):

    APRA expects ADIs to fully apply interest rate buffers and floor rates to both a borrower’s new and existing debt commitments. APRA expects ADIs to make sufficient enquiries on existing debt commitments, including consideration of the current interest rate,remaining term, outstanding balance and amount available for redraw of the existing loan facility, as well as any evidence of delinquency. ADIs using a proxy to estimate the application of interest rate buffers and floor rates to the servicing cost of existing debt commitments would, to be prudent, ensure that such a proxy is sufficiently conservative in a range of situations, updating the methodology to reflect prevailing interest rates.
    Last edited by Chris W; 19-10-2017 at 01:28 PM.

  2. #102

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    In light of the above information I just entered my numbers in to my banks "How much can I borrow" calculator. If I had to renew my loans today I'd be $120k short.

    It was interesting how tweeking a few digits here and there had a huge impact on the final number. $5k on a credit card took $20k off the lending for example.

    My fixed loans are up in 5 months time so it could be a whole new ball game by then. Still I'll be working on rejigging a couple of areas just in case.

  3. #103

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    Quote Originally Posted by Murph View Post
    Will do for sure!
    This site has been invaluable to me over the last 7 years!!
    Our draftesmen has approached council who on the face of it are happy with the proposed development.
    We need to apply for resource consent to go up to 4 units as the high density zones only allows for 3.
    We have a company who will launch the resource consent and another who will lodge the building consent.
    Both of which will cost in the area of 100k all up which is alot of money but small potatoes in the grand scheme of things!

    Murph
    Hi Murph

    Is the loan from the bank conditional on you getting a fixed price contract from your builder?
    I'm interested in this as I've heard if you are short on equity/cash, banks will be willing to borrow you the construction amount if you have fixed price contract - and everything else adds up (valuation etc.)

  4. #104
    Join Date
    Sep 2007
    Location
    Auckland
    Posts
    7,481

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    Quote Originally Posted by Murph View Post
    I got a Quantity Survey done which put the total at 700k including 150k in contingencies.
    Add to that 100k for any BC and RC and all the other back and forth with council to get it across the line.
    Cannot fully cost it out until the construction drawings are complete but we are good friends with the building companies owner who has looked at the Quantity Survey and says he can do it better.
    So all up so far I am up for:
    $750 for a QS
    $1k for initial designs that council reviewed and was not opposed too.
    $1800 for a topographical survey to assist construction drawings.
    10k for construction drawings

    Once construction drawings are complete we get it priced up and apply for BC and RC

    Murph
    All sounds sensible.

    Only thing is some builders don't want to quote until you have BC because the plans inevitably change during that.

  5. #105

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    Quote Originally Posted by Learning View Post
    In light of the above information I just entered my numbers in to my banks "How much can I borrow" calculator. If I had to renew my loans today I'd be $120k short.

    It was interesting how tweeking a few digits here and there had a huge impact on the final number. $5k on a credit card took $20k off the lending for example.

    My fixed loans are up in 5 months time so it could be a whole new ball game by then. Still I'll be working on rejigging a couple of areas just in case.
    Are your loans currently interest only basis or P&I?

  6. #106

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    Quote Originally Posted by Chris W View Post
    Are your loans currently interest only basis or P&I?
    The bigger ($500k) of the two is IO the smaller ($250) P&I. 62% averaged LVR so shouldn't be a problem if I need to shop around.

  7. #107

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    Quote Originally Posted by AlexL View Post
    Hi Murph

    Is the loan from the bank conditional on you getting a fixed price contract from your builder?
    I'm interested in this as I've heard if you are short on equity/cash, banks will be willing to borrow you the construction amount if you have fixed price contract - and everything else adds up (valuation etc.)

    Yes fixed price contract as to be received and accepted by the bank

  8. #108

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    Quote Originally Posted by Learning View Post
    The bigger ($500k) of the two is IO the smaller ($250) P&I. 62% averaged LVR so shouldn't be a problem if I need to shop around.

    Ive currently got 1.3m on IO with 50% LVR

    So once the development is done I think I will be closer to 44% LVR

    Im tossing up putting most of it PI.
    I would have various fixed terms for security... Say 1, 2 ,3 and the majority on 5.
    I would have a revolving loan at about 100k as this is what I can pay down in a year from our business.
    So after a year once the Revolving credit account is close to zero we will let the first 1 year fixed roll over and pay that off over the next year etc.

    Murph


 

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