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Mortgage Archives - Mortgage Advisers - Mortgage Lab

It happens to almost everyone eventually.  You walk into the bank, ask for an amount of money, either to buy a car, house or business and the bank declines you.  Today we’ll look at what to do if the bank declines you for a home loan for your next investment property because, according to their calculations, you don’t have enough income.

Typically, the three main questions a bank will ask is : 

The Income Hurdle

All Mortgage Lab Advisers are taught to answer two income questions:

In other words, even if the bank says yes, can the Adviser sleep at night knowing this mortgage is in place?

Fortunately, these days, the answer is very rarely yes to the first question and no to the second. This is because the banks have some very conservative requirements on income for mortgages. 

To understand why a bank might say no to you purchasing further investment properties, you need to understand how the banks calculate how much they think you can afford. 

Anticipating future interest rates

The banks calculate the amount of mortgage you can afford at, or around, the mid 7% interest rate. They are (obviously) aware that interest rates are currently much lower than that, however they need to know you can afford interest rates at a higher level.  

Some argue that rates have been higher than that in the past (much higher if you were around in the 80’s).  Shouldn’t they be calculating the mortgage affordability at 11%?  The theory is, if interest rates start to head north again, you’ll have a few years notice to remedy the situation (ie; sell the property) before it goes significantly above the 7%/8% mark.

Rental income

Every Mortgage Adviser knows, the banks perform “shading” on all rental income received for investment properties. Typically this is 25% meaning if you earn $20,000 of rental income per annum, they will count it as $15,000 actual income. 

Doesn’t seem fair, does it? The first thing clients say when they hear this is there’s no way an investment property is going to be vacant for 3 months (25%) every year. If it is, it’s a terrible rental property!

But this shading includes additional costs such as repairs and maintenance, rental management fees, and sometimes rates and insurance. Given that, 25% shading of income is actually about right. 

Credit Cards

As we have seen in previous blogs, Credit Cards can have a major affect on the amount you can borrow. The banks must assume you’re going to max out the cards so often take the limit, not the actual amount you owe when calculating your income. 

Number of cars

One bank in particular adds a cost of ~$500 per month per car that you own. This can add up, especially once you own 3 or more cars and can significantly reduce how much you can borrow. 

What to do if the bank says no because of income?

So you’ve applied to the bank and been told no because, according to the bank, you can’t afford it.  Here are some things you might want to investigate:

Reduce unused Credit Card limits

As we’ve seen, these are just eating away your “useable income” at the bank. If you’re not using the limits reduce them and get confirmation letters from the companies to show the bank.

Get a rental appraisal on the new property

Real Estate Agents and Property Managers will supply you with a rental assessment that shows what you’re likely to rent this property for.  It might be more than you think.

(Pro tip: if the assessed rental is a range – eg; $300-$330 – the bank will use the lower of the range, in this case $300)

Consider getting Boarders into your home

Do you have a spare bedroom?  Get a Boarder (otherwise known as a flatmate) in.  The banks will usually allow up to $150 per week of boarder income which raises your annual income by $7,500.  The banks usually allow a maximum of 2 Boarders so don’t go overboard with this!

Remove your Student Loan

Only have a couple of hundred dollars left on your Student Loan?  It may be worth paying this off beforehand.  As long as, by paying it, you don’t end up using too much of your deposit (and creating a “Equity Hurdle”, you will free up a significant amount of income by removing the Student Loan payment from your payslip.

Pay off any HPs that are almost finished

Much like Student Loans, the banks have to take any Hire Purchase payments off your income; even if you only have a few payments left.  If you only have a small amount left and it’s not going to affect your deposit, get rid of them!

Increase rental on existing rental properties

Are you under-renting your existing rental properties?  A $20 per week rental increase is an additional $1,000 per annum.  This can make a surprising difference to how much mortgage you can borrow.

Sell a car

As we saw above, at least one bank takes the number of cars that you own into account.  If you have an excess amount of cars, consider selling one.  This may also help your deposit!

Ask the boss for a raise

Most clients think we’re joking when we suggest this but a $2 per hour raise is the equivalent of an additional $4,000 per annum increase in income assuming a 40 hour per week job (it’s best not to point that out to your boss though!).  This can help you get to where you need to be.  It’s worth the question!

Time to reassess

If you have tried every option above, at this point it is time to reassess.  Is the bank correct?  Is it possible that you have completed your budget incorrectly and you can’t afford the new mortgage?  If so, that’s ok.  Start to adjust the price level you’re looking for down and see what else is available in the market.  If you are still sure you can afford the mortgage you have one more option.

Consider using non-bank lenders

There are finance companies that will lend on a purely “asset only” basis.  Typically they lend up to a maximum of 70% of the property and don’t ask any questions about your income.  They assume that you have done your homework and can afford the mortgage.

What to expect from non-bank lenders

Firstly, the interest rate will be higher than the banks.  The companies are taking a big risk by not assessing income so they need to be compensated.  Expect interest rates to ranges from 6.5% to 14% depending on the lever of risk that you bring (bad credit, LVR etc).

There may also be fees, some annual, some one-off.  They can typically range from 2-3% including the broker fee (we aren’t paid commission by these companies so we have to charge a fee).

Finally, have an exit plan.  The non-bank lenders don’t typically want to be your mortgage provider for more than 2-3 years.  They want to understand what you’re going to do with the property that will enable them to be removed as lender.  In this article, we’ve been looking at a shortage of income.  Perhaps you’re going to renovate the property so it brings in more income (at which point you will refinance back to the banks).  Perhaps you’re expecting a major pay rise in the next few months, or one of you is on maternity leave and will be returning to work.  These are all good reasons to pay a higher interest rate for a short amount of time to secure a good property.

Bringing in partners is not a great option

This is going to be hard for some people to hear but bringing in your friends as “co-borrowers” is not the bank’s favourite answer to an income shortage.  It sounds, on the face of it, like a great idea.  Bob is a mate and has spare income; why not bring him on board?  The problem is, friendships are tenuous and can fall apart.  And nothing puts a strain on friendship like money.  

What happens when Bob want his income to purchase another property?  Will you be able to raise the finance to pay him out.  If you can’t do it now, it seems unlikely.

The banks refer to this as a “borrower of convenience”.  You don’t have enough income so you grab a friend in from off the street.  These days, the banks simply decline these applications.

You have options

There are many ways to fix an income shortfall.  The key is to:

It happens to almost everyone eventually.  You walk into the bank, ask for an amount of money, either to buy a car, house or business and the bank declines you.  Today we’ll look at what to do if the bank declines you for a home loan for your next investment property because you don’t have enough equity in your existing property.

Typically, the three main questions a bank will ask is : 

The Equity Hurdle

The equity hurdle is probably the easiest to figure out.  This is uniform across all the main banks so you know you’re on even playing ground.  The current maximum LVR any main bank can lend is: 80% on Owner-Occupied property and 65% on existing investment properties or 80% on new build investment properties.

(Note: you can borrow higher on Owner Occupied properties if it is your first home.  Once you start to buy investment properties, the banks will typically lend to an 80% maximum).

How have they valued your current properties?

If you have been declined because you don’t have enough equity, the first thing to find out is how have they estimated the value of your existing houses.  Is it by Council Valuation?  Is it by Desktop Valuation?  If it is, is that a true valuation of your property?  If you have done significant amounts of work to your property, it’s likely the value of your existing properties is higher and it’s time to think about ordering a Register Valuation.

Registered Valuations for existing properties

When you are going to give the banks a Registered Valuation, it is important to order it through the bank system (ask your Adviser which system to use).  This is because, in years gone by, clients have chosen “more liberal” valuers or tried to influence the price.  These ordering systems confirm independence to the bank.  The downside?  You may end up with a very conservative valuer which may value your property lower than others would.  This is the unfortunate risk and the only solution is to reorder another valuation if you are unhappy with the first number.

Consider new-build properties

As mentioned above, main banks can lend up to 65% on existing properties and 80% on new-build properties.  You shouldn’t underestimate what a difference this makes if you are facing the Equity Hurdle.  Consider an example where you have a $500k owner-occupied home that has a $100k mortgage:

Obviously this example is subject to you being able to afford these amounts.  It is simply meant to show you how much more you can purchase buying new versus existing.

What constitutes a new-build?

To be a new-build property, the Code of Compliance must have been issued within 6 months of you purchasing the property.  You must also be purchasing directly from the Developer.

Go outside the banks

If you really want to buy an existing property but are being limited by the 65% LVR rule, there is another option.  The main banks are restricted to 65% maximum LVR but non-banks aren’t?  They can typically lend up to 80% on investment properties and there are 2 or 3 companies that will happily do this.  Their interest rates can be 1-2% higher than the main banks however if you have found a good opportunity, this may be a small price to pay.

A classic example of this might be if you have found an existing property that needs some TLC or repairs.  You calculate that with $50,000 of work, you can increase the value by $100,000.  The banks say no because you don’t have enough equity but you can get the mortgage from a non-bank lender at 2% higher.  Let’s say this comes to an additional $7,000 in interest per year).  Is it worth paying an additional $7,000 in interest to make $50,000 in profit (or $43,000 after additional interest)?

The goal may well be to increase the value of the house and refinance it back to the main banks once it meets the 65% LVR criteria – maybe in a year or two.

Get family help

It is very common with our first home buyers and increasingly so with our first investment buyers to receive help from family.  Receiving a gift from parents does not overly complicate the application to the bank if it is documented correctly.  Ideally, the money would be a long-term gift – repayable upon the sale of the property.  If it is a loan that requires regular payments, this may simply shift your hurdle from Equity Hurdle to an Income Hurdle.  If you are unsure how help from parents will affect your application, ask your Adviser to run the different scenarios.

You have options

For a problem that seems so concrete and immoveable, you actually have a lot of options.  In summary:

In recent years, the Reserve Bank has been working on reducing the amount of Interest Only mortgages in New Zealand. In the article below, we look at how it affects you as an investor.

Responsible Lending

In our opinion piece, “is it time for banks to rethink their Interest Only policy?”, we looked at the latest statistics out regarding Interest Only vs P&I mortgages.  At the time, Interest Only mortgages made up 27% of the existing mortgage market.

The Reserve Bank’s requirements to reduce Interest Only have worked to a certain extent.  In August 2016, Interest Only mortgages made up 38% of new lending.  Just 2 years later it is 31%.  You would expect new lending to be higher than existing because of the time limits placed on Interest Only loans (see below).

There is a place for Interest Only

Interest Only mortgages aren’t inherently bad.  Take the example below of an investor that has a $300k mortgage against their own property and $600k mortgage against their investment property.

Interest Only

The wrong way and the right way to pay off a mortgage.

They have 2 options for paying down their mortgage over 30 years:

There are no extra points for guessing which one we think is the good option.

Result

If the total mortgage payment is the same, the result is the same.  You will pay your mortgage over 30 years under both options, however in option 1 you are reducing your tax deductible interest payments which means you could be missing out on tax refunds.  Option 2, however, keeps the maximum tax deductions in place as long as possible.

These tax expenses can add up to thousands of dollars every year.

The problem with the green tick

But there is a problem with option 2.

In the example above, the investor is going to take about 14 years to pay down the personal ($300k) mortgage and the remaining 16 years will pay off the investment ($600k) mortgage.  But banks these days only allow you to be Interest Only for a maximum of 5 years (2 years on your own property).  After that, you are required to start paying all accounts on Principal and Interest even if you are over-paying other parts of your mortgage (as in option 2).

And plenty of our clients are striking this problem.  As they approach the 5 year mark, banks are demanding the clients begin to pay Principal and Interest.

If, after an explanation of your “option 2” strategy, the bank refuses to extend the Interest Only period, the only way forward is to refinance your lending to another bank which allows you to reset the 5 year Interest Only period.  This is not the optimal outcome but is something we’re seeing more and more.

For the right reasons

If you are going to refinance to another bank because your Interest Only period is up, you must make sure that the structure at the new bank is correct.  In the example above, this client would refinance after 5 years but must continue to pay down the mortgage over (now) 25 years.  Any other outcome is worse for the mortgage holder.

Are you affected by this?

If your mortgage is:

you need to speak to your mortgage adviser and your Accountant.  The review will take around an hour and the whole process should take about 3-5 hours of your time.  If you can save a few thousands of dollars per year for 5 hours work, we highly recommend you do it!

Kiwis like Credit Cards… a lot.  If you’ve got 10 minutes, you could get one online right now (don’t).  And the price for easily-acquired, unsecured debt is usually ~20% p.a.

I know what you’re thinking.  Not me, I’ve got an interest free Credit Card.  Well that interest free period expires soon and a lot of people forget to move the card on.  The simple fact is Credit Cards cost a lot.

Credit Card minimum payments

Typically, Credit Card companies require a minimum payment based on the balance.  Most are around 3% per month meaning that if you owe $5,000, you need to pay $150 the following month.

As a side note, if you don’t pay your minimum payment, it is noted on your credit report for all the banks to see.  Make sure you make these minimum payments no matter what.

Balance vs Limit

Notice that the minimum payment is based on the balance – how much you actually owe – not your maximum limit.  So if you owe $1,000 and have a limit of $5,000, your minimum required payment is approximately $30 (3% of the $1,000).

But when you apply for a mortgage, the bank assumes a minimum payment of 3% of the limit.  Why?  Because the bank has to assume the worst-case scenario.  They have to assume you are going to max-out the Credit Card and you have to be able to afford the Credit Card minimum payment and your mortgage too.

How much does a Credit Card reduce your ability to buy?

Assume you have a limit of $10,000.  As we now know, the banks calculate a minimum monthly payment of $300 regardless of your actual balance.  But how much mortgage does $300 buy you?

Well, banks calculate the mortgage payments at ~7.5%.  We know they’re currently lower than that but the bank wants to know you can afford them when they go up.

A $50,000 mortgage at 7.5% (principal and interest) is around $4,195 per year or $350 per month which is pretty close to that $300 mark.

It turns out that a $43,000 mortgage costs (according to the bank calculator) almost exactly $300 per month which is the equivalent of a $10,000 Credit Card limit.

How can this help you?

Despite Kiwis loving Credit Cards, we often don’t have them maxed out either.  As Mortgage Advisers, we often see balances of $4,000 with unused card limits of $20,000.  If the client is a responsible spender, this doesn’t affect him or her in their daily life.  But, if that client is struggling to borrow enough, reducing that limit from $20,000 to $5,000 could let them borrow an additional ~$65,000 (as long as their deposit allowed for it).

it doesn’t matter if you are buying your first home or your 10th investment property, if you face an Income Hurdle, a very quick fix is to reduce your unused Credit Card limit and make yourself that much more attractive for the banks to lend to.

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time!

We are holding a Questions and Answers session with our panel of experts. There will be around 20 people in the room so everyone will get a chance to ask their questions.

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house-buying process.

Doors open at 6pm. We will get started at 6:15pm. Don’t worry! We have plenty of parking available.

Address:

Century 21
12 Silverdale Street
Silverdale, Auckland

Powered by Eventbrite

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new?  What a waste of time!

We are holding a Questions and Answers session with our panel of experts.  There will be around 20 people in the room so everyone will get a chance to ask their questions.

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night.  This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like.  You should leave the session comfortable to move forward with the house buying process.

Address:

Harcourts
Level 2
3/2 Te Pumanawa Square, Northwest Shopping Centre
Massey, Auckland

Powered by Eventbrite

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

When you’re looking for an investment property, you are often either looking for capital growth or yield (ideally a positive cash return).  There’s a quick and easy trick that we, at The Mortgage Lab, use to calculate yield on any property we’re looking at.

Calculating Yield

Last month we looked at The Rule of 72 to calculate how long it would take to double the investment.  This month, we look at how to calculate the yield on a property.  You’re going to need the following bits of information:

As an example, a $600,000 property might receive $500 per week rent.

$500 * 52 weeks is $26,000
$26,000 / $600,000 is 0.043 (or 4.3% return).

So this property has a 4.3% (gross) return based on rental income to value alone.

Information from the yield

A 4.3% return would cover some interest rate payments (currently) but won’t cover additional expenses like insurance and rates.  Each individual property requires a different amount of income to get positive cash results.  What we’re looking for is a quick calculation to see how one property compares to another.

A quick calculation of yeild

Let’s say that 5% yield is a decent baseline for yield on a property.  If we’re looking for yield, anything below that is probably not worth investigating any further.  What is a quick calculation to get 5% return?

Well, very approximately:

if weekly rental is 1/1000th of the value of a property, the yield is around 5%

In the example above, the house was worth $600,000.  If the rent had been $600 per week, then:

$600 * 52 weeks is $31,200
$32,000 / $600,000 is 0.052 (or 5.2% return)

The 2 second calculation of yield

So for any property you are looking to purchase, knock the last 3 numbers off and you have the rent required to get to around 5%.  A $750,000 property needs a $750 per week rent.  A $400,000 property needs a $400 per week rent.

Auctions can be a little bit overwhelming.  They’re meant to be.  It’s why they result in higher prices for the Vendors.  To help ease the stress, here are 6 quick tips you should consider before going to bid on a property you love.

Quick auction tips

  1. Go to other auctions first so you know how they work.
  2. Have a firm idea of your maximum bid.  Auctions are meant to get you excited and in the moment.  Bidding without a price ceiling can lead to severe buyer’s regret!
  3. If you need to change the settlement date, let the Real Estate Agent know well in advance.  This is often possible but needs to be signed off by the Vendors.
  4. Much like the settlement date, if you don’t have the required deposit – usually 10% of the purchase price – let the Agent know well in advance (at least 3 days).  This will need to be approved by the Vendors.
  5. If you have any questions beforehand, don’t hesitate to talk to the Agents at the auction.  They want bidders so they will be happy to help you through the process.
  6. Always keep in mind that when the hammer falls, and you are the last bidder, you have unconditionally bought a house (assuming the bidding has met Reserve).  The property will need to be signed off by the bank before the auction.  This means sending us a copy of the auction documents 3 working days before the auctions.  The bank will have questions about any disclosures or unusual clauses in the auctions documents.

 

Welcome to our First Home Buyers Questions and Answers session.

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time! Our Q&A session means you get answers to all the questions you have.

Our Panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house buying process.

Doors open at 6pm and we will get questions started at 6:15pm. Parking is available in all Financial Design carparks outside. Come along early to grab some nibbles.

Powered by Eventbrite

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new?  What a waste of time!

We are holding a Questions and Answers session with our panel of experts.  There will be around 20 people in the room so everyone will get a chance to ask their questions.

$70 worth of items with your ticket

Early-bird tickets are available in August for $29.95.  For less than $30 you’ll receive:

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night.  This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like.  You should leave the session comfortable to move forward with the house buying process.

Address:

SubUrban
Level 1, 2 Johnsonville Road
Johnsonville, Wellington

Doors open at 6pm and we will get questions started at 6:15pm.  Plenty of parking available.  Come along early to grab some nibbles.

*Note: to receive your free E-Valuer report and book, you must attend the seminar.

Powered by Eventbrite

 

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.