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A high-profile mortgage broker has revealed that clients with sizeable portfolios are being dragged down by new serviceability requirements from lenders, with expenses right down to children’s school fees beginning to come into play.
Ross Le Quesne, principal of Aussie Parramatta, says changes to many lenders’ serviceability requirements are creating headaches for clients with multi-property portfolios.
Speaking on the latest episode of The Smart Property Investment Show, Mr Le Quesne explained that clients’ abilities to service their existing portfolios, and purchase additional properties, have been significantly diminished in recent months as lenders react to APRA’s crackdown.
The transition by several banks to repayment calculations based on principal and interest, as opposed to interest only, has already seen clients scrambling to come up with double or triple the income they required previously.
“We probably had half a dozen lenders who would assess on interest only, for example. Now, on a million dollars the bank might assess at 4.5 per cent, that’s $45,000 a year. Now, they’re assessing those same loans at principal and interest at about $86,000 a year. So it’s an increase per million dollars of about $40,000. So for a client with a couple of million-dollar portfolios, if they’ve got a $3 million portfolio, that’s an extra $120,000 of income they have to come up with to service the same portfolio they have,” Mr Le Quesne said.
Changes to the way lenders assess living expenses is also affecting the ability of existing investors to expand their portfolios, according to Mr Le Quesne.
“Previously, the same benchmark was used for somebody earning $50,000 and living in the outer suburbs to somebody earning $500,000 and living in, for example. So the living expenses aren’t the same and the regulators realise that, so they’re putting the onus on the banks to say ‘Based on your income [that] is going to be the lowest benchmark you’re going to need to use for living expenses’.
“This is something that we’ve just seeing over the last couple of months that we’ve seen some changes in and we expect more changes around those living expenses to come in.”
Expenses right down to private school fees now have to be declared by investors when they apply for new finance, a development that Mr Le Quesne says could severely limit future borrowing capacity.
“If someone’s paying private school fees, is a great example. That’s a massive expense for somebody, previously hadn’t been declared on a standard liability sheet over the last couple of years... with the responsible lending, it’s something that’s come in that we need to factor in. So the banks will now factor those sorts of expenses in as part of your overall borrowing capacity and reduce the amount that you can borrow."
How your living expenses will affect your borrowing ability and is it time to chat to your lender?
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