How do banks assess rent income?

Every lender has their own way of assessing the rent you receive from your investment properties. As a general rule lenders will take 80% of the gross rental income and will enter this in their serviceability calculator along with other income such as your salary.

The reason lenders use only 80% of your rent is that they assume that 20% of the rent you receive will be used to pay for managing agent’s fees, council rates, strata levies, repairs and to cover for any vacancies.

However not every lender assesses this income in the same way. Some will only use 75% of rent, some will not apply tax to the rent, others will. In particular many lenders differ on the way they assess negative gearing benefits and the assessment rates they use to calculate the impact of your current debt commitments.

As a result the major banks and other lenders tend to vary significantly in the amount that they will lend to property investors.

My bank says I am rental reliant!

Did you know that earning too much rental income is considered to be a bad thing? Successful property investors often hit a wall once they are earning more income from rent then they are from their salary. From a lenders point of view highly exposed investors tend to be high risk borrowers as they can be affected by market downturns more severely than normal home owners.

Below is an example of the “rent reliant applicant” policy of one of our lenders:

“Where significant portion of borrower’s income is derived from rent and the proposal is heavily reliant on rent, the application may be considered too rent reliant.
Level of gross rental accepted for servicing should not exceed:

• 40% of gross salary or wage for incomes less than $60,000
• 65% for incomes $60,000 – $100,000
• 70% for incomes greater than $100,000″

If you are classified as rental reliant then the banks may decline your application or only take part of your rent income into account when assessing your loan. Did you know that not every lender considers rent reliance to be a problem? Contact us for more information.

Renting to your family

Many investors decide to buy investment properties close to their own home and then to lease them out to their extended family. By keeping it in the family you can reduce your risk of having troublesome tenants and enjoy having your family close by.

Unfortunately many people who rent to their family have a hard time proving the rent income that they earn as there is managing agent and often no formal tenancy agreement in place. Some lenders can take this into account and will accept alternate evidence of your rental income such as a letter from your family, tax returns or a transaction history showing credits to your bank account.

Housemate income / sub tenants

First home buyers that want to buy a 2 or 3 bedroom home but do not have the income to afford it may lease out a room to a friend, technically this is known as leasing to a sub tenant. Again this can cause trouble when applying for a loan as almost all lenders do not take any rent from flatmates into account when assessing if you can afford a loan.

It is possible to get a home loan depending on the percentage of the property value you are borrowing, how reliant you are on the income from your flatmate and what evidence you can provide to show the rent income. These situations can be a little trickier, so please contact us for more information.

Rent from a dual occupancy

We commonly have applicants that have a property that has two dwellings on it, often in the form of a duplex, granny flat, house that has been converted into multiple units or a block of land with two houses on it. Proving the rent income from these types of properties are generally no problem as in most cases formal tenancy agreements are in place.

Rent to buy & vendor finance

Vendor finance, wrap strategies & rent to buy schemes have become increasingly more popular in recent years, particularly with investors that follow Steve McKnight or other popular property investment writers. One of the biggest problems that these investors have is that as their portfolio grows banks begin to say that these investors cannot afford their level of debt, even though in actual fact most of the properties are positively geared!

This problem stems from the way lenders assess loans. They may assess your repayments at principal and interest over 30 years at an interest rate that is 1.5% to 3% higher than the actual rate that you are paying. Also they only take 80% of your Wrap income into account and ignore that your tenant is paying for council rate and other outgoings. As a result your investing grinds to a halt.

Some lenders are not as conservative with investors earning wrap & rent to buy income. The secret to success with wrapping properties is in choosing lenders with low LMI, low exit fees and a credit department with an appetite for investors with wrap income.

Do all lenders assess rental income in the same way?

No! Each lender has their own view as to how rent from your investment properties should be assessed. As a general rule most lenders will accept only 80% of your rent income. Other lenders such as Westpac and ANZ will accept only 75%!

One of our lenders can consider assessing your loan using 100% of your rent income. In addition to this they will also assess your existing debts at the actual repayments rather than at a loaded assessment rate. This drastically increases the borrowing power of investors with positively geared properties.

Apply for a loan

We are mortgage brokers that specialise in finding solutions for people who are in situations that are outside of the box, in particular for investors that earn rental income that is difficult to prove or does not meet standard guidelines. If you would like to know how we can help with your home loan then please contact us or enquire online.