Are you receiving rental income on a property that has a ‘rental guarantee’?

How will the banks view your income? Read on to find out more.


What is a rental guarantee?

A rental guarantee provides owners with the assurance that they will continue to receive rent on their property.

Many investors choose to buy properties with a guaranteed rent return so that they avoid the risk of vacancy, missed rent payments and, in some cases, property management fees.

Generally, government guarantees are in line with the market rent, have no management fees or expenses paid by the investor.

There are several main types of properties with guaranteed rental returns:


How much can you borrow?

  • First home buyer: Not applicable
  • Investor: 95% of the property value or up to 105% using a guarantor (conditions apply).
  • Low doc: 80% of the property value.
  • Discounts: Competitive professional package and basic loan discounts are available.

Note: Many lenders decline loans for properties with rental guarantees. Others may use the market rent only when assessing your ability to repay the loan, not the guaranteed rent which is often higher.


Why are the banks so conservative?

Most people consider a guaranteed rent income to be a good thing! And usually it is, however to a bank a rental guarantee may pose a higher risk.

This is because most rental guarantees come with a caveat lodged on the property to secure the tenants interests. In other words the property is “locked in” to that tenancy and if sold must be sold to an investor who wants to continue to rent it out. As a result properties with a long term tenancy over 3 years may take longer to sell.

Government guarantees from the Department of Housing or Defence Housing Australia may pose little problem as the rent is usually paid on time. Please visit our page to find out more about getting a DHA home loan.

Developer and builder rental guarantees are often at above market rates and are built into the sale price, so ultimately you end up paying for the guaranteed rent anyway.

There are several cases of the rental guarantee being cancelled a year or so after the purchase, so lenders tend to assess your ability to repay the loan using the market rent, not the guaranteed rent.

  • Ponglaze

    I have rental guarantee on a property and I want to use the rental income I earn to help me secure a 70% low doc loan. Can you help?

  • Hi Ponglaze, yes, we can help you with this. Please note that mortgage insurance is normally applicable when borrowing more than 60% of the property value when it comes to low doc loans. You can speak with an expert low doc mortgage broker by calling 1300 889 743 or enquire online for a free online assessment:
    https://www.homeloanexperts.com.au/free-quote/

  • Krull

    I want to buy a DHA property and that property itself has a rental guarantee so will that be okay?

  • Hey Krull,

    DHA properties have become popular with investors who want guaranteed rental income and no tenanting obligations. It’s fine but some lenders don’t like DHA properties despite it having guaranteed rental returns. Please check out the DHA home loan page to find out about this and the relevant policies in detail:
    https://www.homeloanexperts.com.au/property-types/dha-home-loan/

  • Baldwin

    Hi, can I get a 90% low doc loan to buy a rental-guaranteed property in the suburbs?

  • Hi Baldwin,

    You may be able to get a high lend low doc loan though it should be noted that you can expect to pay over 9% p.a. for this. The security must be a standard house, apartment or townhouse located near a capital city, and you must also have a clean credit history to qualify. We recommend that you only apply for a 90% low doc loan if you can soon prove your income or can reduce your LVR to 80% quickly.

  • dani daher

    hi

    what companies in Australia that offer guarnteed rent .can i have th best 5 and what banks i should deal with

    thanks

  • Hi Dani,
    A guaranteed rental return for investors is offered by several companies. I couldn’t recommend any I’m sorry.
    There are several banks that can accept this income type however they tend to just use the market rent when calculating if you can afford the loan so you’ll need a good income to get approved.

  • dani daher

    Hi,

    thanks for the reply.

    why you don’t recommend any company. do you have any idea what are the best companies that offer that eventhough you dont advice them

    thanks

  • I haven’t seen any that I feel comfortable recommending. I would strongly recommend that you do your research. DHA is possibly a better choice however I haven’t seen what they are offering in the last few years.

  • dani daher

    thanks but did you ever heard that such comapnies as DHA not doing thier promise or something like that .

  • dani daher

    Hello ,

    can foreign buy these properties or it is just for residents of Australia. second question can the investor sell this property after the lease ends or pay all his mortgage.

    thanks

  • A foreigner has to meet additional conditions. The main one is that it must be a new property. It’s very hard to get a loan as a foreigner so you may find it’s easier to invest in something else right now https://www.homeloanexperts.com.au/non-resident-mortgages/

  • dani daher

    thanks for the reply.
    i will be resident next year but im asking as my income mught be from outside the country .my last question can this prpoerty be sold after finishing the mortgage or end of the lease or there are restrictions

  • An income from overseas while living in Australia is often not accepted. Unfortunately the banks are really not supporting this type of application at the moment.
    You can sell the property at any time however in most cases the new owner must take over the lease if it’s a rental guarantee. In other words they couldn’t live in the property. So it’s harder to sell as it’s a smaller market.
    You can sell while it still has a mortgage, the loan just gets repaid from the sale proceeds.

  • dani daher

    hi ,

    how much do I need as downpayment if i want to get mortgages for these rental properties without income verification as in uk it is 25 percent and in Canada is 20 percent what about here

  • Hi Dani
    In Australia typically you can get an 80% loan with limited income verification (known as low doc) https://www.homeloanexperts.com.au/low-doc-loans/
    That means you need 20% as a deposit and another 4 – 5% to cover purchasing costs.