Rental Reference Letter
What is a rental reference letter?
A rental reference letter is a supporting document you submit as part of your home loan application when you want to borrow between 90-95% of the purchase price.
It confirms how much you pay in rent and demonstrates your ability to save money.
You can show it to lenders as proof that you’ve been paying rent on time. This gives the lender the piece of mind that you can save money.
Please note that most lenders will only accept a rental reference letter from your property manager and not from a landlord.
What is it generally used for?
Use a rental letter if you can’t prove you’ve saved a deposit.
When borrowing more than 90% of the purchase price, a lender will need to be satisfied with your ability to make repayments.
Generally, you can demonstrate this by showing proof of regular savings over a period of three to six months, which is commonly in the form of contributions to a savings account.
These savings will need to add up to 5% of the purchase price plus the costs of completing the purchase.
Otherwise known as ‘genuine savings’, it’s a policy of almost all Australian lenders and they tend to be quite strict on this requirement.
That means if you’ve been gifted a deposit from your parents or recently inherited a large sum of money, banks will still need to see evidence that you’ve saved five percent of the purchase price yourself.
Luckily, there are lenders out there who will consider a rental history letter from your real estate agent or property manager in place of this genuine savings requirement and allow you to borrow up to 95% of the purchase price.
On top of that, you can still can get the same competitive interest rates as a standard home loan.
Some lenders will even accept 3 months rental history backed up by a rental reference letter if you can’t show genuine savings.
A rental reference letter can also be used to build a stronger application if you have a poor credit score and can’t prove that your deposit has come from regular savings.
Some lenders will accept your situation but they will want to see some kind of ‘capacity’ or proof that you have the ability to make your mortgage repayments.
Providing a 12 month rental reference letter is a good indication of your capacity and it will be accepted by some lenders.
If it’s a private rental (not through a real estate agent), the lender may also ask for 6 months bank statements showing rent paid.
For example, you could have a 20% deposit but if you’re discharged bankrupt and you can’t prove genuine savings, you may get declined unless you can provide a history of rental.
Partial genuine savings
In situations where you don’t quite have 5% in genuine savings, some lenders will accept a rental history letter so you can borrow up to 95% of the purchase price.
What if I don’t have a rental reference letter?
If you don’t have genuine savings and can’t provide a rental reference letter, we may still be able to get your loan approved if you have:
- A 10% deposit: With such a large deposit, some lenders will waive the genuine savings requirement and you can still get a great deal on your home loan.
- An otherwise strong case: If you’re in a strong situation apart from meeting the genuine savings requirement, we can still help you borrow at 95%. Conditions apply and your interest rate may be a bit higher depending on what lender we go with.
- A guarantor: If your parents are in position to use their property as security for your home loan, you can borrow up to 105% of the purchase price without genuine savings.
How do I get a rental reference letter?
You can contact your real estate agent and ask for both a rental reference letter and a rental ledger.
While a rental letter is more of a declaration from your property manager, the rental ledger will provide a clear run down of the rent you’ve paid over a 12 month period including how much was paid and the date the rent was paid to the landlord. It’s sort of like a bank statement but for your rent.
It’s preferable that you provide a rental letter over a ledger purely because the ledger has more information on it that the banks can use against you when assessing your application.
For example, if you were late with rent on just one or two occasions, a lender will be able to see this on the ledger and it won’t look good for you as a borrower.
What does a rental letter look like?
Most lenders will accept the following rental history letter template from your real estate agent:
To whom it may concern,
Re: Rental reference – John Smith
We wish to confirm the following:
Tenant name(s): John Smith
Property address: 1 George Street, Sydney NSW 2000
Commencement date of lease: 1/1/2007 to present
Current rent: $450 / week
Payment history: All payments have been on time during the last 12 months
Should you require any further information please contact me on 02 9000 0000.
1 Pitt St Sydney NSW 2000
Ph 02 9000 0000
What if I don’t have a property manager?
If you’re renting but you didn’t go through a real estate agent (you’re just in an arrangement with the landlord), the following template will suffice in conjunction with 12 months (some lenders will accept 6 months) bank statements clearly showing rent being deducted on a weekly basis:
To whom it may concern,
This letter is to verify that John Smith has been a tenant in our rental unit located at 1 George Street, Sydney NSW 2000 from 2nd February 2009 to current date.
The monthly payment is $1,470 and has always been paid on time. This tenant has proven to be an upstanding individual and has shown respect to the property and other tenants.
If I can assist you with further information regarding John Smith’s residency at my property, please feel free to contact me on 02 9000 0000.
1 Pitt St Sydney NSW 2000
Ph 02 9000 0000
Why do banks ask for this document?
Lenders will ask for a signed rental reference letter if you cannot prove genuine savings as proof that you have the ability to pay off your mortgage.
The reason that this letter is a good indication of your capacity is because, when renting, a portion of your income is being deducted from your bank account to pay rent.
For some lenders, this is the same as saving that amount every week in a savings account.
Perfect rent over a 12 month period is also an indication that you will not miss or default on your mortgage repayments when you get a loan.
It’s important to note that in a low interest rate environment and, depending on the property price, mortgage repayments can be about the same or less than paying weekly rent!
How do I make sure the letter is not rejected by the lender?
Having a good rental history isn’t always enough to get your home loan approved.
Most banks have complicated lending policies which exclude some tenants such as:
- Sub-tenants (not on the lease).
- Privately-rented properties (not via a real estate agent).
- If you do not have a 12 month history. There is an exception to this, with one of our lenders accepting 3 months rental history instead.
- If other people are on the lease with you (share accommodation).
- If you have moved house during the last 12 months.
In addition, lenders will not accept the rental letter unless it contains the following information:
- Your full name.
- The property’s address.
- Commencement date of the lease.
- The current rent you pay per week.
- A declaration that you’ve been paying your rent on time for at least the last 12 months. This doesn’t have to be with the same property just as long as it’s 12 months continuous history. This means that multiple reference letters may need to be provided.
- Full name and signature of your real estate agent.
Why don't banks accept letters from landlords?
Most lenders will not accept a rental history letter from a landlord because landlords can be anyone and are not registered professionals like real estate agents/property managers.
Hypothetically, you could have a portion of your bank account funds deposited into your friend’s account and they could then sign a rental reference letter. Don’t do this!
Although banks are quite strict with the rental letter coming from a real estate agent, some lenders will accept a letter from landlord if you can provide 12 months bank statements.
What about a character reference?
A bank will not require a character reference in normal circumstances. However you may need to provide one if you are renting for the first time and do not have a rental history.
To whom it may concern,
I have known John Smith for over 10 years on a personal and professional basis. We went to school together and have also worked together at ABC Mining Pty Ltd.
He has proven himself to be reliable and financially stable. I strongly recommend him as a tenant and expect that he’ll pay the rent on time and look after the property.
If I can assist you with further information regarding John Smith, please feel free to contact me on 02 9000 0000.
1 George St Sydney NSW 2000
Apply for a rental letter home loan today
Please complete our free assessment form or call us on 1300 889 743 and we can tell you how you can use your rental payments as proof of your ability to pay off a home loan.
Still have questions? Feel free to comment below and we’ll get back to you as soon as possible.