Podcast: 5 Strategies to Get More Money From the Bank and Pass the Income Stress Tests | Ep. 232

Posted by Ed McKnight on 05/05/20
5 Strategies to Get More Money From the Bank and Pass the Income Stress Tests 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss 5 different strategies that you can use to pass the bank's servicing stress test. Whenever you apply for a mortgage from the bank, the institution will stress-test your application through different criteria.

If you don't have enough income to pass these stress tests, you can improve your position by decreasing your expenses ... not by spending less, but by restructuring your financial payments.

We also mention our upcoming property investment webinar, which is being held this Tuesday at 7pm. You can sign up using the previous link.

This episode is based on a previous webinar we held called How to Grow from 2 to 5 Properties. Check out the whole webinar through the link.

Transcript

Transcript of the Podcast


Ed McKnight:
Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about these five strategies you can use to increasing your serviceability when you're doing a mortgage application. Now this comes from the most asked about topic when we did our property investor survey. Remember the top question people had was, how can I grow my property portfolio from two to five properties and get more money out of the bank.

Now this is the webinar that we did actually just two days ago, and it was incredibly popular and that's why we want to go over the key parts from this webinar. And a big part of it remember, is how do you get your mortgage application for additional lending past the bank. Now we're going to talk about the income side, so showing the bank that you have enough income, but one of the key take outs from the webinar is not necessarily that if you're not passing the banks servicing tests in terms of income, it's not necessarily that you need to go and get more income. It's that we just need to restructure your debt so it looks like your expenses are lower.

Now, that sounds like some trickery, but it's actually not. It's just that how the banks test your financial liabilities in many cases. So let's go through these five strategies and give some examples around them.

Number one is cancelling any unused credit cards. Now, what's really important is when you put in your application, and let's say you've got a credit card limit of 30 K now what the bank is going to do is they are going to test that as if you've maxed out the credit card and are paying the minimum repayments back on that credit card.

Now, you might actually have nothing owing on that credit card, but what they're doing is protecting themselves in the case that they give you the lending and then you go max it out and are now making the minimum repayments.

So, if there was a 30 K limit say Andrew, what sort of repayments would the bank be calculating and what would we do or what would we recommend to get those bank expenses down or those expenses in the bank size down?

Andrew Nicol: So basically, on a 30 K credit card limit right now, the bank will assess a $900 a month repayment on that 30 K limit. So it's a huge amount of outgoings, $1000 a month, almost that's automatically discounted from your income. So that makes a huge amount of difference in terms of what someone's borrowing ability is.

And so our suggestion here was either cancel the limit all together if you're not using their credit card or just reduce the limit onto something a bit more manageable like five or $10,000 because yeah, like Ed says the difference now between a few years ago is if you paid your credit card off a few years ago in full, the banks would just wipe it out as zero and just say, okay, well these people use their credit cards as we want to see, and well actually probably not as they want to see, because they don't make any interest, but they can see that you're paying it off so there's no actual interest being incurred.

But nowadays under the responsible lending guidelines, they have to take the credit card limit at its full and they have to assume the minimum payments on that, which is $900 a month.

Ed McKnight: Yes, now I had a question as well on the webinar. Somebody said, I've got a $500 credit card. Should I be cancelling it? The answer is, look if it's such a low limit like that, it's not going to make much of a difference because the minimum payments would be something like $25.

Now the next strategy you can use, and I'll take strategies two and five together because they relate, is about paying off any Q Visa or Gem cards and consolidating that debt potentially into your mortgage repayments.

So the idea behind this, as you might have a Q or a Gem visa card, you're paying something off at $50 a month and it's over a two or three year period. What you could do is consolidate that into your mortgage repayment i.e. increase your mortgage a bit, pay off those cards and then that payment is actually within your mortgage.

Now the benefit of that is you're going to have a lower interest rate, or even if it's interest free, you're paying it over a longer period. Now, Andrew, how does this kind of work and what effect does this have?

Andrew Nicol: So this is an interesting one because it's one that I've come across more and more often now. So I would say that most people that I meet have an higher purchase or Gem Visa of some kind, because all of the major retail groups are giving these interest free terms and they set up these Gem Visas with limits, or they should have a hire purchase with interest free period of 12 months.

And whilst it's smart to use someone else's money for free, the detriment to your borrowing ability can be quite drastic. So, for example if you have a 16 K hire purchase it might be costing you $750 a month in repayments. Yes, there's no interest on that, but again, you've got a good amount of money that's being taken out of your net available income and is going to stop you being able to borrow more money to buy investment properties or buy your own house.

So it really has a massive effect from the banking side of things, despite the fact that it's smart using someone else's money. And so our recommendation is to consolidate that, if you added that 16 K onto your mortgage, it would free up surplus of $674 a month, by extending that term, in my opinion, paying a little bit of interest on that loan to get yourself ahead faster is well with the extra interest.

Ed McKnight: Hey, and we've got two more. Let's do number three. This one is really interesting, which is stopping any voluntary Kiwisaver payments. So you might be making an 8% payment, or contributing 8% from your income towards your KiwiSaver. But actually the bank is assessing that as an expense, the full 8%, even though you could actually stop it.

So, Andrew, how would we get around this?

Andrew Nicol: So, this is an interesting one. So we don't give advice on KiwiSaver.

So my disclaimer is there, one thing that I would say about KiwiSaver is if you're putting money aside into a product that you don't have access to, I wouldn't be using it as a major mechanism for savings because if you're putting an 8% and your employer is only putting in 3% then that extra 5% you could put somewhere else and get a similar term, but have freedom to access your money, and it probably wouldn't count against your servicing in the same way.

Whereas banks, they'll look at your net amount that's coming into your bank, and so they'll take that full 8% out. My recommendation would be drop it to the 3% so that you get the maximum amount that you can from your employer. You're still putting in 3% getting 3% match, the extra 5%.

If you want to put that into a savings account, that's great. If you want to put it into your own managed fund controlled by you, that's probably even better, but certainly don't go overboard putting money into Kiwisaver and I see a lot of people who are getting closer to retirement doing this. Remember that the government tells you when you take that money out.

When the retirement age is pushed out to say 67 or 70 that's going to affect your access to that money. So, I don't think it's a wise decision anyway and certainly it is going to impact on your serviceability now.

Ed McKnight: And hey, just before we get to the last topic as well, one of the major themes that came out from the property investor survey was the idea that a lot of people want to build a passive income and retire early.

I'll just say for all your property investors out there who want to retire at 50 or 55 just be wary of putting too much into your KiwiSaver cause you won't be able to access it until you reach the government's mandated retirement age, which might be 65 67 70 potentially by the time you get there. So just be aware of that if you want to retire early.

Now the last one, and this is one I'm going to spend a little bit more time on, cause we got some more questions, which is around extending the term of any existing loan. So, your personal mortgage at the moment might be on a 15 year term, but if you extend that to 30 years, first of all, yes, let's just put the disclosure out there.

You will pay a little bit more interest, but that's going to decrease the repayments you're making to that and it's going to free up cash in order to be able to pass the banks servicing tests. Now remember that when the banks do their servicing tests, they're really stress testing it. So you just need to show that that cash is available. You may actually end up paying down your mortgage at the same rate.

And Andrew, walk us through how this works cause I know you've got some numbers for us.

Andrew Nicol: Yeah. So this was actually, I wanted to clarify this a little bit more because I've been told that I can speak quite quickly, particularly in the webinars. And actually one of my good clients followed up with a phone call today Manuel, I'm sure you're listening, and just wanted some more clarification around this.

So I wanted to show an example of what I meant by this. And one key thing that I want to make clear here is that I'm not telling you to pay your loan off any slower. Just to extend the term. So you've got the ability to have some flexibility there.

So, let's say you've got a 300 K mortgage, so someone's got a 300 K mortgage at the moment, and the paying it off over a 15 year term. So they've been diligent and gone into the bank and asked to increase their payments, most likely the bank has shortened the term to increase those payments now at 3.5% interest rate that works out to be $500 a week, that that person is making a repayment.

Now, what my advice would be in this instance is to work out how much more you're paying than what the minimum is on a 30 year term. So in this case it works out to be around about $300 a week if you're on our 30 year term. So there's another $200 extra or $10,000 a year. So then what you do as you take of your 300 K mortgage, you extend the term, you take a ten thousand chunk of that, and you put it on revolving credit as a separate account from your everyday account, and then you put your minimum payments, the $300 into the $290,000 loan and then the extra $200 that you have saved doing that, you put into the revolving credit, so you're still making total payments of $500 a week.

You're still going to pay it off at least at that same term and then the great thing is every year you can look at making a lump sum payment. So if you've paid back that entire $10,000 in 12 months, you take your 10,000 out of your revolving credit, you'll apply that to the main loan. Now that's down to two 80 and you can carry on doing this again and again and again.

Now the advantage of doing this is when the bank looks at what your serviceability looks like they will see a loan on 30 years and they'll assess that and the revolving credit limit, and it will drastically change the amount that you can borrow for any future properties.

Ed McKnight: Exactly. And a lot of what we're talking about here is simply restructuring your finances and the financial payments you're making so that you've got more unencumbered income that the bank can see yes okay.

That could be used in the situation that interest rates went up in the situation that there was vacancy on a property. And so that's really what we're talking about here. We're not saying pay off your debts over a longer period.

Of course, structuring that way, but actually if you can pay it off at the same amount, but just structure it so you can get the lending out of the bank. And this is the sort of stuff you weren't teaching people when you were working for the bank were you either, Andrew?

Andrew Nicol: Definitely not. No, definitely not. We just, we went in the path of least resistance, which was to shorten someone's term.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. It really does help us get the message out to more people and hey, if you want to come along to our next webinar, which is happening and coming up this Tuesday at 7:00 PM we're going to be talking about how you can live off your property portfolio.

I know we did a podcast on this. just a couple of weeks ago, but we're really gonna dig into even more strategies for how you can do this. So I'm going to link to that in the show notes. Just tap or swipe over the cover art. It'll take you right there.

Thanks for listening to the Property Academy podcast. I'm your host. Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.