On the upside, every other borrower I now encounter at property auctions will also be similarly constrained, so hopefully I won’t get outbid as much.
It is estimated the move chops about 5 per cent off a person’s maximum borrowing power.
Before Wednesday’s announcement, I had crunched some rough figures with my current lender, who indicated that on top of my existing $710,000 mortgage, I may be able to borrow in the region of $530,000 for an investment property. That’s a total potential borrowing power of $1,240,000.
So, at 5 per cent, the reduction knocks $62,000 off my total borrowing power. Given I can’t instantly repay my mortgage, that comes off the investment loan – a more than 10 per cent decline in my borrowing power to invest.
Given some extra cash I have ready to tip in, that probably reduces my ultimate maximum property bid price from $550,000 to more like $480,000.
So, I’ve had to revise my investing plan of attack.
Previously, I was looking at buying a two-bedroom unit in inner Canberra. The city has decent rental yields of about 5 per cent, but potential capital growth is somewhat constrained by plentiful supply of new land – both infill and at the suburban fringe.
But I had figured if the capital growth didn’t pay off, I’d just enjoy the rental income, tax deductions and, if things really went badly, I could sell my current place and move to Canberra for retirement.
The thought of spending my sunset years reading books in the sunny members’ lounge of the National Gallery of Australia, looking out across Lake George, actually brings me great pleasure (it’s beautiful; do visit when you can).
However, as I watched them over the past few months, inner-Canberra prices were already getting away from me, and the new borrowing squeeze makes it even less likely I can afford to buy something there.
I can definitely still invest. It’ll just have to be something cheaper and further out. And having grown up in the outer suburbs of the national capital, I’m not certain if I am as keen to retire there. Time to widen the search!
So, I’ve requested a fresh loan application form from my bank, and I am getting ready to fill it out.
As always, I’m immediately stuck on the bit where they ask you to estimate your monthly living expenses.
Fortuitously, I am about to take four weeks’ annual leave to finish a book I have been writing on the very subject! It’s a step-by-step guide to help you consider every possible expense you may encounter in life, find savings at every turn and ultimately arrive at a realistic estimate of your monthly living expenses.
Knowing this number is crucial for several reasons. For one, as I’ve discovered, it’s always the first thing lenders ask you when you want to borrow money. They (and you!) need to know you can afford the repayments. Having a good grasp of your living expenses can help you leverage to maximum effect.
It will also help you to decide how much to save for emergencies. Most finance gurus recommend having between 3 and 6 months’ of living expenses sitting in an easily accessible emergency fund.
Looking ahead to retirement, knowing your monthly living expenses is also a key part of knowing how much you need to save.
So, I’m popping the property investing on ice for a month or so, while I figure all this out. You can read all about it when I’m done!
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Source: | This article originally belongs to smh.com.au