A couple who own their home with some equity are introduced to a buyers’ agent. The agent finds a $400,000 unit in Melbourne and sends them a cash-flow projection: around $100 a week out of pocket after rent and tax, a fee of $19,000 for the search and negotiation, and an $8,000 retainer to start. They pay the retainer and come to us for the loans.
The loans do not work. Not because anything is wrong with the couple, but because the projection and the lender’s arithmetic describe two different purchases.
The scenario
The couple have no cash deposit. The plan is to release equity from their home for the deposit and costs, then borrow the rest against the unit. The agent’s email describes this as an 85 per cent loan against the home and a 90 per cent loan against the investment.
The projection attached to the same email is built on an 80 per cent loan against the investment. That one assumption changes most of the other lines. Side by side, what the proposal said and what the lender would use:
| What the proposal said | What the lender would use | |
|---|---|---|
| Loan on the unit | 80 per cent in the projection (90 per cent in the email) | 90 per cent |
| Loan on the home | Not shown | 85 per cent, to release the deposit |
| Lenders mortgage insurance | None | On both loans, about $33,000 |
| Interest rate | Headline rate for an 80 per cent loan | More than one percentage point higher |
| Rent | $480 a week in the projection ($420 to $440 in the email) | $420 to $440 a week |
| Tax benefit | Negative gearing rebate as it stood before the 2027 changes | As it applies now, and at the couple’s own marginal rate |
| Deposit loan repayments | Not included | Included |
| Out of pocket per year | About $5,000 | About $20,000 |
| Fee | $19,000 | $19,000, which is 4.75 per cent of the price |
With the loan sizes, LMI, rates and rent the lender would actually use, the out-of-pocket cost is closer to $20,000 a year than the $5,000 the projection shows. That is before the $19,000 fee, which on a $400,000 purchase is 4.75 per cent of the price.
The outcome
Two things settled it. The valuations on both properties came back under the online estimates the plan relied on, so the equity to release was smaller than assumed. And the couple had recently cleared tax debts, which narrows the lenders who will consider a loan above 80 per cent; the one structure that might have worked without LMI, an 85 per cent loan against the unit, was the one the valuation would not support.
So we set out, in writing, the funding positions that had been tested and why none of them closed. The agent’s contract asked for a lender’s formal knock-back before the finance condition could be used. No broker will lodge an application that cannot succeed to satisfy a term like that, and we said so. The couple withdrew from the purchase. The agent has since agreed to refund the $8,000 retainer.
What mattered
The projection was never checked against a lender’s numbers before money changed hands. Each of the five differences above is small on its own and easy to miss; together they turn $100 a week into close to $400.
The order of events mattered. The retainer was paid before anyone had tested whether the loans existed. Reversing that order, loans first, retainer second, costs nothing and changes everything about the couple’s position.
And the finance condition mattered. A clause written so that it can only be used after a formal application has failed is not a finance condition in any useful sense. The time to read it is before signing, not after.
Checking a projection before you pay
Any investment cash-flow projection can be tested in ten minutes with five questions:
- What loan-to-value ratio is each loan built on, and does it match the loans actually proposed?
- Is LMI in the figures, on every loan above 80 per cent?
- Is the rate the one a lender would offer at that ratio, or a headline rate?
- Where does the rent figure come from, and is it the same figure used everywhere in the proposal?
- Are the repayments on any deposit borrowed against another property included?
The investment property calculator runs the same arithmetic a lender does, LMI and deposit loan included, and it now has a line for the buyers’ agent fee, shown as a share of the price. The figures it produces are the ones to compare a projection against. We build these tools because our work does not stop when the repayments start; a client who can test a proposal in ten minutes is one who does not need to recover from it.
When it turns cash-flow positive
The other question any projection should answer is how long the shortfall lasts. Run both sets of figures forward with the same assumptions, rent growing 3.5 per cent a year, running costs 2.5 per cent, interest rates unchanged, both loans principal and interest over thirty years, and the two purchases part company quickly.
| The proposal’s assumptions | The lender’s assumptions | |
|---|---|---|
| Year 1 | About $7,300 short | About $23,000 short |
| Year 5 | About $4,700 short | About $20,700 short |
| Year 10 | About $800 short | About $17,400 short |
| Year 20 | About $9,300 ahead | About $8,500 short |
| Cash-flow positive from | Year 11 | Year 28 |
| Shortfall funded until then | About $42,000 | About $360,000 |
Rent growth is doing the work in both lines; what differs is how much it has to overcome. On the proposal’s figures the gap closes in a decade. On the lender’s, it takes most of the loan term, and the cumulative shortfall before it closes is close to the purchase price. Whether capital growth makes that worthwhile is the next section; the point here is that the couple were shown the first line and would have been living the second. The investment property calculator runs this forward for thirty years, with the deposit loan included if it is ticked, and shows the year the line crosses zero.
Adding property growth
Cash flow is half the picture. The other half is what the property is worth against what it cost to get in, and here the up-front costs matter as much as the loans. On the proposal’s figures the entry costs are about $42,000: the $19,000 fee, stamp duty and legal costs. On the lender’s they are about $76,000, because LMI on both loans adds roughly $33,000. Growth has to earn that back before the purchase is ahead at all.
The table takes the cumulative cash flow above, subtracts the entry costs and adds the growth in value, at two rates of capital growth, with everything else as before.
| Overall position (growth, less cash shortfall and entry costs) | The proposal’s assumptions | The lender’s assumptions |
|---|---|---|
| Year 1, 5 per cent growth | About $29,000 behind | About $79,000 behind |
| Year 5, 5 per cent growth | About $39,000 ahead | About $75,000 behind |
| Year 10, 5 per cent growth | About $168,000 ahead | About $27,000 behind |
| Ahead from, at 5 per cent growth | Year 3 | Year 12 |
| Ahead from, at 3 per cent growth | Year 6 | Year 25 |
Growth is not a forecast; 5 per cent is close to the long-run national average for houses and generous for a unit, 3 per cent is a quieter decade. The point is the gap between the columns, which comes from the up-front costs the projection left out and the shortfall it understated. On the lender’s figures at 3 per cent growth, the couple would have been behind for most of the loan term. Selling costs, which would add agent’s commission and legal fees to the way out, are not in either column.
Understanding
A projection is a set of assumptions, and the only ones that matter are the ones a lender will use. Knowing what those are before paying a fee, and before signing anything with a finance condition in it, is what keeps an investment purchase a decision rather than a recovery.