Find a bank that will use all of your investment income!
Many Australians like to diversify their investment portfolio into shares and managed funds outside rather than just the real estate market.
Unfortunately for business executive Ben, his success in investing didn’t help him when it came time to buying his very first property.
He quickly found that not all lenders will use dividend and investment income when assessing a home loan application.
Ben, 34, had spent a number of years building a career in the corporate space, eventually rising to become an executive director at a large Australian company.
Wary of putting all of his eggs into the Australian property market, he decided to instead invest his money into a managed investment scheme (MIS) through his bank.
Luckily for Ben, a strong market coupled with sound financial advice saw him build an investment portfolio worth around $400,000.
Coupled with his base salary of around $175,000, he felt it was time to take the plunge and buy an investment property.
Up until this point, Ben and his wife and two kids had been renting so this would also be his first property purchase.
Ben was looking to buy a newly-developed property worth around $3.2 million.
Most banks limit your borrowing or Loan to Value (LVR) to around 75% of the property value for home loans over $2 million.
The property, located in Mosman, was also four units on one title which can limit your borrowing power with some lenders.
For Ben, putting down a larger deposit wasn’t an issue: it was servicing for the loan amount.
“Servicing” is the calculation banks use when they’re trying to work out whether an applicant has a strong enough income to debt ratio to be able to afford the mortgage repayments.
They will also look to see if you have any dependents and, in this case, Ben’s wife was a stay-at-home mum and they had two children.
Unfortunately, most banks will only look at Ben”s base income of $175,000. They won’t take into account his dividend income.
Others will only use a small percentage when calculating servicing, typically capping the rate of return at 2.5%.
They will then only use 80% of that income when adding this back to the applicant’s base income.
In Ben’s case, most banks would only use $80,000 of his total $400,000 portfolio as additional income for his application. That’s bonkers!
Since he was looking to borrow upwards of $3.2 million, he simply wasn’t showing enough income to afford the loan.
On top of all that, Ben needed to find a lender that would allow him to purchase the property in a family trust under a corporate trustee.
A clever solution
Not all lenders take the same approach with dividend income!
After speaking with experienced mortgage broker Preeti Kowshik, Ben was able to find a lender that would:
- Accept 100% of his dividend income.
- Allow him to borrow over $2 million.
- Accept multiple units on one title.
- Accept a family trust structure arrangement.
If you’re in an unusual situation, it’s always best to speak with an expert.
Ben was able to add back more than $300,000 to his income, bringing his total assessable income to around $500,000.
All that Ben needed to provide was:
- 3 years trust returns.
- 2 years financial statements for his investment portfolio.
- 3 years personal financial statements.
A happy ending
Ben was able to get pre-approved for a $3.2 million at 80% LVR (the maximum LVR for a low doc family trust loan).
He was even able to qualify for an offset account as an exception to normal family trust loan policy.
In this way, he can reduce his interest payments and get the most out of his investment property.
Do you earn dividend income?
Please call us on 1300 889 743 or complete our free assessment form and we can help you qualify with a lender that takes a common sense approach to this income.
You may be able to increase your borrowing power just by choosing the right lender!
Disclaimer: This client story was written in 2016. The lender policies present in this client story may not be available now. For updated lender policies, please contact our mortgage brokers.