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Australian Property Podcast

May 5, 2022

So in today's episode I want to discuss how someone can maximize their borrowing capacity by using interest only lending so if you'd like to get in touch i'd love to hear from you please send me an email at jp today you give me a call on

0423475336 and please note as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions so today i wanted to talk a little bit around the scenario of how someone can potentially increase their borrowing capacity by using interest-only lending now a lot of people are probably quite familiar with the concept that traditional banks will actually reduce your borrowing capacity when you're going on interest only and the reason for that is because they're seeing the remaining term after the interest only period um as requiring you know the whole loan to be paid off so for example let's say standard 30 year loan term if you do not have any interest only you're paying off the mortgage steadily across the full 30 years if you have five years of interest only first it means you need to pay off the whole mortgage in the 25 years remaining so typically banks actually benchmark it you know harsher if you're actually um going to basically be on interest only because the remaining term when you're paying principal is going to be shorter now the exception to this scenario is if you're looking at non-bank lending then what happens is some of the non-banks will actually look at other lenders um repayments at the actual repayment or near the actual repayment so for example um in this scenario this is a live one of all very similar to a live one that i've looked at recently so i wanted to actually walk through the exact parameters here so let's say you have um an investor with three properties they're worth 500 000 each and each have a mortgage of 400 000 so basically total debt of 1.2 million total value 1.5 million so sitting at 80 now let's assume all is on principle and interest principle and interest repayments across a full 30-year term on a three percent interest rate basically the repayment on that is 5060 per month and the banks will be testing this on a two percent higher rate so the bank is actually using a repayment rate of 6442 per month that's based on a five percent rate 30-year p i investment now these are loose figures the assessment rates at banks are different and actually typically even potentially higher than this again but for rough figures for today we'll use these numbers so in this example you can actually see here that um the client you know in this example actually had zero borrowing capacity left with traditional banks based on the income level um so the client then came to us we looked at um three existing properties moved to interest only and basically we did that initially with the bank because it could still pass an interest only with a bank and by going with the bank we're able to still keep it uh you know with i guess um more competitive financing on the sort of specific rates and everything like that and so if we assume it all refinanced interest only instead of principle and interest um the former repayment of 5060 a month is going to come down dramatically and that's when it will now become about hundred and one 3501 per month um so you can see there there's quite a big difference so um then what happens is from there now that we have reduced the repayment level on all those existing debts that's when we go to a non-bank lender who's going to take the actual repayments or near the actual repayments um so what the calculation they'll now use is existing repayments of 3501 for the existing debts per month whereas formally it was four hundred forty two per month so you can actually see in the calculation here this opens up a difference of about two thousand nine hundred and forty one dollars cash flow per month now this amount of cash flow per month um in some cases may even be enough to add you know toward a million dollars of borrowing capacity with some lenders um where someone had no capacity left at banks to start with so this is um sort of i guess loosely based on a live scenario that i have worked with i've worked with a number of um people over the years on similar ones and this was actually a strategy um that i learned about uh probably going back more than five years ago now and so this is tried tested and true been around for a long time and there is a lot of capacity to be gained doing this the downside really of the strategy is obviously you are heavily leveraging yourself up you're going to have a huge potential p i cliff when the interest only ends so you know this is all um you know stuff that you need to do your math on there so this is a very high risk approach um a lot of people won't want to do this you're also going to be taking on you know potentially higher financing risk going to the non-bank for the new purchase so this is an extremely high risk strategy but i wanted to just talk through the numbers today because um you know i'm a mortgage broker myself and it is always you know useful to go through real life examples where real numbers are presented on the table and i think that when some people can see sort of how this calculation is actually done it may help them for their future plans so if you'd like to discuss anything further please get in touch and please note as always everything discussed here is done so far entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions really appreciate you tuning in as always thank you so much