How to get bank to lend more?

[Lego]

Hi folks,

I have purchased 2 rental properties and am still looking at buying more. However, the bank won't lend me more funds based on my income.

The 2 rental properties are 100% borrowed and the loans are secured using my own home. The equity is about at 33% of the total portfolio. I have decent income from work and have a strong cash surplus. Therefore, although the rental properties are negatively geared, I have no problem in servicing them. They have achieved good capital gains since.

I know some PIs have build up large portfolios with 10+ IPs. but what is the secret in persuading the bank to lend more?

TIA

[RonHoyFong]

One Bank Trap

Hi Lego

If you used the equity of your home to purchase two IPs then it appears you may have fallen into the "one bank trap".

When the one bank says no more, you find you are suddenly screwed.

Suggest to go and see a Mortgage Broker to undo your problem.

Best set up would have been to Mortgage your house to the max instead, initially as a revolving credit, (you can fix term this later), then split the money up into different deposit amounts, then go to a different bank or banks to raise a mortgage as you buy your additional IPs. As each bank maxs out and turns you down, or gives you and unfavourable loan, you have the flexibility to move on to another lender.

Forget being loyal to just one your personal lender because the most they can generally lend is somewhere between $500K to $1m limit, then can no longer help you any more.

Cheers Ron

TIP - AVOID THE ONE BANK TRAP

[Lego]

Thank you RonHoyFong!

But when I go to another bank, I will be asked if I already have loans with any other lenders. Then they will subtract the amount from the loan they are prepared to offer, won't they?

Say they assess my income and decide I could borrow 500K, if I already have borrowed 400K with another lender, the new bank is only gonna offer me 100K. How to get around this?

[drelly]

Hey Ron,

By mortgaging your own home to do this and putting the equity into your rentals, you're worsening your tax position... Or did you put your own home into your LAQC and lease it back??

[Cliffy]

Hi Ron, DRelly

By mortgaging your own home to do this and putting the equity into your rentals, you're worsening your tax position

Yep, this is what I did - use LOC on own home to loan to LAQC to purchase IPs. Now I have 80% mortgages on IPs (would rather 100%) and bigger PPOR mortgage meaning less tax deductible mortgage.

I see the only way this works to enable you to keep purchasing is if you do either or both of:
1) Buy below market value
2) Add value (do-up / extra room / extra dwelling)

Then you can refinance the IP mortgage to repay the PPOR mortgage and recycle the deposit to another IP.

If you used the equity of your home to purchase two IPs then it appears you may have fallen into the "one bank trap".

Ron, are you saying more than one bank can't have security over your house? If you have significant equity, surely each bank only needs security over a portion of it to cover the 20% deposit?

[Fritz]

Lego

Lego,

I started in exactly the same position. High salary and IP;s.

There are 2 fundamental ratios the bank will look at:

1) security or LVR. If you manage to buy right, and try and stick to 80%LVR, BOX TICK. (You can go higher, however you are then into LMI ($) and also raise eyebrows with the banks. Buy low/do up refinance is my preferred method.

2) Debt servicing. Most banks will only allow 75% of your rental for debt servicing (Westpac now 90%), PLUS 45-50% of your PAYE income. BOX TICK. This means pretty much you got to get 10%ers gross (as a rough guide) to keep going indefinately.

I used to be on very high salary, however if you are negatively geared and only 45% of your income counts towards debt servicing, you are boxing yourself into a corner.

The trick for me was to switch from -CP and concentrate more on +CP and BINGO.

The trick to keep going is to be mindful of these 2 COMBINED factors. Fail one, do not tick box, do not go past go, do not collect....

Also, one thing Ron pointed out at his great free lunch (and was also new to me) was the term rent reliant. He said once you cross around 15 IP or 3 MIL in borrowing, the bank will deem you rent reliant meaning they will IGNORE all your other income.

While this is good news to keep going, it makes it even more important to get +CP IP's.

You are saying you are negatively geared. Without knowing all your facts, you will find that is where the sticking point will be. You fail tick box 2.

As to not disclosing to other banks other lendings you have, I personally would not go down that path. You have to be careful to tell the truth and disclose questions you get asked for the entity you are borrowing.

The bank can and possibly will make life very difficult if put in a position where your application is based on untruths.

Have fun.

Fritz.

HINT: I once failed a debt servicing test for having a large GOLD card, banks count them as the credit is AVAILABLE and COULD be used wether they are used or not. All I did was lowered the limit, got approved, applied for a new card.

[Gerrard]

Yep, this is what I did - use LOC on own home to loan to LAQC to purchase IPs. Now I have 80% mortgages on IPs (would rather 100%) and bigger PPOR mortgage meaning less tax deductible mortgage.

Two ways to get around this:

1) Interest on any money you personally loan to LAQC is tax deductible - keep good records and a clear audit trail in case you are audited.

2) Set up a Revolving Credit facility in the name of your LAQC, at the same bank as your onw house, secured against your own house. - Nice and simple for the accounting then your can just shift money around between banks and accounts under your LAQC's name.

Gerrard

[fudosan]

Re: Lego

Also, one thing Ron pointed out at his great free lunch (and was also new to me) was the term rent reliant. He said once you cross around 15 IP or 3 MIL in borrowing, the bank will deem you rent reliant meaning they will IGNORE all your other income.

Very much agreed. It is important to try to make each property stand on its own financials instead of relying on your salary income.

I once failed a debt servicing test for having a large GOLD card, banks count them as the credit is AVAILABLE and COULD be used wether they are used or not. All I did was lowered the limit, got approved, applied for a new card.

My experience with a gold card is the bank constanly encourages me to get a higher credit limit but is not willing to reduce it. Does anyone know of any gold card that allows you to reduce the credit limit to a level you like, say $2000, but still gives you bonus such as free travel insurance and mileage points?

[RonHoyFong]

Hi Everyone

I guess my previous explanation wasn't clear.

A - Borrow to the max on your own home as a revolving credit

B - Transfer funds to your LAQC as a loan as you require it.

C - pay all the cost of the fees valuations and mortgage expenses for the loan from the LAQC.

D - All interest paid for this Loan to the LAQC should also be paid by the LAQC.

E - The money xfferred into the LAQC now becomes a deposit for your IP
and if your lucky it can be as low as a 10% deposit on the first few places.

F - After the deposit, the balance needed to settle is raised as a totally different 1st Mortgage on the IP and has no link to the revolving credit on your home.

G - Providing you can improve or add value to IP as well as buying belowe Registered Valuation you can get the place revalued to recycle the newly created equity of the IP.

H - Having found your 2nd IP then you repeat steps B,E, and F. above.

ie Try to have Bank "A" carry all the Mortgage on your Home
Use the freed up cash loaned form Bank "A" as 10% to 20% deposits on your IP's.
Borrow the 80% to 90% first mortgage from Bank "B" then Bank "C", then bank "D" etc.

When you have run out of deposit money from you house go and raise the mortgage on all the IP's to raise more money for more IPs and the re-follow the steps above

Cheers Ron

[Fritz]

Lego,

the other suggestions seem to have overlooked the fact you are negatively geared.

I thought about this example to illustrate the point. I do not know your numbers, all you said was negative geared.

This topic is close to my heart as I fell into it. i am ignoring gold cards, hire purchases etc to make a point at 7.5% interest. All numbers are rounded behind the comma. Values are exaggerated and rents are low but I have seen a few fellow IP investors with 400K properties renting for 300 a week.

Here goes:

Lego House PPOR (Private)
Value: 200K Loan: 160K = 12K interest
PAYE income: 100K (banks allow 45% for debt servicing, ie 45K)
Tick box 1: LVR TICK 80%
Tick Box 2: Debt Servicing 45% = 45K income - 12K = TICK
Debt servicing ratio 12K interest / 45K = 0.27 ratio

IP 1:
Value 400K Loan 320K = 24K interest
Rent gross: 15K 75% Bank Rules = 11.25K for debt servicing
Add this to PPOR
Tick Box 1: LVR 80% TICK
Tick Box 2: DS 12K+24K=36K /
11K rent + 45K PAYE = 56K = 0.64 ratio TICK (going up)

IP2
Value 500K Loan 400K = 30K interest
Rent gross: 20K 75% Bank Rules = 15K for debt servicing
Add this to PPOR and IP1
Tick Box 1: LVR 80% TICK
Tick Box 2: DS 12K+24 +30K =66K /
11K rent + 15K rent + 45K PAYE = 71K = 0.93 ratio TICK (just)

Can you see Lego that with each purchase your ratio gets worse ? Do your math with a similar 400K house on IP 3 and you see WHY the banks are hesitant.

You may be making huge capital gains but still fail TICK 2. If you do IP 3 with your existing rules you will push your debt servicing ratio past 1 ,meaning your interest exceeds your bank calculated revenue, and it is an automatic FAIL with first tier lenders.

SOOOooo....what to do if you want to keep goin???
Options are:

1) Change your rules.
2) Change the banks rules.

Take a pick.

How could you turn this around?
1) Increase your rents by lots, say 100% to fit tick boxes.
2) Sell one and get into +CP
3) Earn more PAYE income
4) Anybodye else.......

If you are game pm me your numbers or better still post them here.

Have fun and don't forget to keep smiling, you are well on your way.

Fritz.

PS: why do banks allow only 45% of your PAYE income ? They simply assume you need the rest to live. Strange as someone on 18K would be different so someone on 100K. If you have 1MIL in the bank the rules are different again, but to most people who start out above rules apply (with minor variations) No point arguing about it, learn them, study them, and apply them to your advantage.

[Robot]

Interesting post.

Ron quick question. If your starting from scratch with no property but a deposit and a high personal income (is over 70k PA considered high? I'm out of touch with N.Z incomes). Would you still put the deposit into a LAQC and buy the IP with the LAQC or just buy the first one under your own name then setup a LAQC? I guess using an LAQC from day one would make the most sense.

[janesco]

Very nicely done Fritz...

I have a love affair with excel so all I have to do is type in the values required. It pops out the answer and it even says loan approved or not as the case may be.

Rather funny though. I just asked my bank if I could have some more money and they suggested that they weren't very happy, did I mind if they didn't lend it to me yet.

Well naturally I did mind but I can wait... I didn't actually have a property in mind anyway.

They turned me down when the new figures would have been 74% LVR (based on registered valuations carried out in July 2004). Serviceability still had about $10k per annum after the loan (based on 70% of rent and 30% paye income). I think they were aware I was within their criteria.

To be fair I am at the $1mil mark. and I have six houses in the LAQC.

I know I have to start looking at a new bank. It seems unfair to me I have used this bank since the 70's. Oh well business is business.

[Cliffy]

Gerrard, you said:

1) Interest on any money you personally loan to LAQC is tax deductible - keep good records and a clear audit trail in case you are audited.

Have you had this tested?

If you are personally lending money to LAQC wouldn't the interest on loan received from LAQC be personally taxable income?

This seems to be similar to one of Ron's points:

D - All interest paid for this Loan to the LAQC should also be paid by the LAQC.

Do you have a regular payment from LAQC back to personal LOC to pay this?

[Holly]

Hi Ron.
Do any loans made to the LAQC from a LOC have to be legally drawn up through a lawyer? Also can anyone clarify for me, if I buy an investment property and it is +CF from the start then I'm thinking an LAQC would be the wrong structure, would that be correct or am I missing something? I am thinking about the correct structure at the moment, but am having trouble getting my head around it all. I intend to buy +CF from the start or at least +geared after tax breaks (depreciation etc).
Thanks Holly.

[Lego]

Thank you very much Fritz, and every one who replied.

Fritz's example has made things crystal clear. But the trouble is that nowadays it is so hard to find +CP properties - well there are still some around, but in not-so-good areas and it means you need to be prepared to deal with possibly difficult tenants. Is it correct?