Property Investment
Private Property issue #128 - Cashflow
Find out what the cash flow looks like for an investment property today.
Property Investment
3 min read
As interest rates have risen from the low 2’s to the low 6’s – the banks have also increased their test interest rates.
Last week ANZ announced it will soon increase this rate to 8.15%. Up from 7.95% at the end of October.
But what does it mean, and how does it impact how much you can borrow?
A test rate is the interest rate the bank uses to “stress test” your mortgage application.
This ensures you can still afford your mortgage in the worst-case scenario, where interest rates increase significantly.
Servicing rates change as interest rates change … sometimes they’re up. Sometimes they’re down.
Here’s how ANZ has changed its test rate over the last 3 years.
The lowest the bank has tested borrowers at was 5.8% in June 2021. The highest in recent memory will soon be 8.15%.
The higher the test rate, the less you can borrow. The lower the test rate, the more you can borrow.
Let’s say back in June, ANZ would lend you $728k for an investment property.
If nothing else changes, that goes down to $523k by the time the test rate changes goes up.
That means you’ve lost out on the ability to borrow an extra $205k.
Here’s how much the same investor can borrow at different servicing test rates.
But don’t beat yourself up if you didn’t apply for a mortgage last week because it’s not all doom and gloom. The test rate hasn’t been 5.8% since about April this year.
Here’s how the same investor’s borrowing has changed as ANZ has adapted their interest rates.
Same borrower, same income, same yield but different borrowing amounts based on ANZ’s test changes.
You can see that:
There are two main lessons here:
Lesson #1 – Get money when you can
Bank policies change frequently.
Some investors think, “I’m going to time the market perfectly” (you can’t. But let’s pretend you can).
Having the perfect crystal ball won’t help you if the bank says no.
Get the lending when you can.
Sure, this won’t be as much of an issue for investors with high incomes and low expenses. But most investors aren’t in this situation.
Lesson #2 – Not all mortgage brokers are the same
Good mortgage brokers show their worth in markets where it’s tough to get money from the banks.
And the adviser who helped get money for your home may not be the right one to help you get the money for investment.
It’s a different ball game.
Last week, on episode 1,144 of the Property Academy Podcast, we shared the story of one investor who got told “no” by 2 mortgage brokers.
They told him he was ‘maxed out’ after already owning 5 properties.
However, Peter Norris from Catalyst Financial (our sister company) freed up equity using the split banking strategy and then used a non-bank lender.
I won’t go through the nerdy details (listen to the podcast for those).
But, one lender said yes, and the investor got his next property.
The moral of the story: a mortgage broker worth their salt will employ strategies and restructure your application to give you the best chance at getting a yes from the bank.
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.