In the past, if you were self employed or a self funded retiree it was tough to prove to the banks that you could afford to buy an investment property.
Nowadays, some banks can cut through the paperwork with a lease doc loan specifically designed for people buying commercial investment properties.
What is a lease doc loan?
A lease doc loan does not require full evidence of your income, instead the lender relies on the strength of the rent income from the property used to secure your loan. So they are similar to a low doc commercial loan.
So how do they work?
- You can borrow up to 65% of the property value.
- No payslips, tax returns, bank statements, BAS or financial statements are required.
- The security must be a commercial or residential investment property.
- Your loan must be NCCP unregulated.
- The lease must have at least 12 months remaining.
- The lease must be at “arm’s length”, that is, not to your own company.
- The lease income less outgoings must be sufficient to cover the interest on your loan.
Which lender can offer you the best lease doc loan for your situation? Call us on 1300 889 743 or complete our free assessment form to find out how we can help.
How do they assess the lease income?
The lender will look at:
- The financial strength of your tenant.
- The remaining term of the lease (>12 months minimum).
- The interest cover ratio.
The interest cover ratio is the number of times over that the lease income will cover the interest on your loan. For example, if you applied for a $1,000,000 loan at an interest rate of 5% and the lender assessed your loan using a buffer rate of 7% then the lender would need to see $70,000 in net rent income for you to qualify for a lease doc loan.
If you were receiving $140,000 in rent income from the property then you would have 2x interest cover because you could pay the interest twice over.
Most lenders require 1.3x to 1.5x interest cover to approve a loan. However, some of our lenders can consider a 1x interest cover if you have a strong tenant and your property is in a good location.
What if I am just signing a lease now?
Although our banks prefer an existing lease agreement, they can consider a proposed lease agreement based on its merits.
Most lenders will require the lease to be fully executed and a bond paid before they will advance the loan.
Which lenders offer lease doc loans?
Major banks do not normally offer lease doc loans. Second tier banks, non-bank and specialist lenders are the main providers of lease doc loans.
We find that if you have a larger deposit and can reduce your loan to 65% or less of the property value then we can normally get your loan approved with a bank at a competitive interest rate.
Call us on 1300 889 743 or complete our free assessment form to find out which of our lenders is best for you.
Banks are stricter on the types of properties that can be taken as security as they do not know if you have the capacity to make repayments using other income sources.
Your property must be:
- Non specialised commercial (retail, industrial, office or warehouse) located in a major metro or regional area.
- Residential property located in a town with at least 10,000 people.
One of our lenders can consider any location on its merits, albeit at lower LVRs and loan amounts.
Residential investment properties as security
Professional property investors often have large portfolios with plenty of rent income and equity, yet are unable to borrow due to the complexity of their situation.
Many choose a low doc loan to help them continue their investing, but if you aren’t self-employed then that isn’t an option.
You can use a commercial lease doc loan on a residential property if your loan in NCCP unregulated:
- Loans in the name of a company (i.e. not to a “natural person”); or
- Loans used predominantly to invest in commercial property, shares or a business.
So you can release equity from a property you own to buy shares however you cannot release equity to buy another residential property as this would be regulated under the NCCP act.
Owner occupied properties aren’t considered
Obviously, a lease to your own business doesn’t count as income evidence! A lease to a family member’s business or to a related business entity also does not count.
Lenders want to see a true arm’s length transaction. If you are leasing the property to a related party then you should consider a commercial low doc loan instead.
Lease doc loans are also not used to release funds for your own business. They are for the purchase or refinance of a commercial investment property.
The loan terms on offer can vary between different lenders.
Most lenders review the loan term in line with the renewal of the lease while others have a set 5, 15 or 25 year term.
Interest only periods may be considered depending on the interest cover you have and the term of your lease.
If you have a large deposit then in many cases we can help you to get an interest rate well below that offered by your bank.
If you have a small deposit, low interest cover ratio and your security property is not ideal, then the interest rate will be a little higher.
Please refer to our commercial loan interest rates page for more information.
Why do people choose a lease doc?
The majority of our lease doc borrowers fall into one of three categories:
- Self funded retirees.
- People with a complex financial situation.
- Self employed borrowers with no income evidence.
The main advantages are that the loan application process is simple and it is easier to get approved.
Apply for a lease doc commercial loan
Are you ready to buy a commercial property? Let us help you to get a great deal.
Call us on 1300 889 743 or complete our free assessment form and our mortgage brokers will assist you to choose the most suitable lender.