There are only a few lenders that can help!
It’s not uncommon for either a husband or their wife to apply for a home loan to buy an investment property as a single applicant.
Similarly, more and more Australians are choosing to buy with the help of family and friends under a co-ownership arrangement.
The problem is that banks consider your liability for common commitments, debts and living expenses at 100% rather than based on your actual percentage share.
Luckily, there are some lenders that will apply a common debt reducer so you can improve your borrowing power.
The banks don’t use common sense!
Most banks don’t use a great deal of common sense when calculating your “serviceability” or borrowing power.
If you’re purchasing a property with your spouse or de facto partner, it makes sense that the lender would consider your living expenses and debts as a whole.
However, they also apply this to applicants buying an investment property with a friend or relative, which can cause strife if you either of you plan to invest in the future.
How common debt can affect your investment plans
Most banks will assess your liability of the total debt rather than based on your actual share in the property, which is usually 50% (under a joint tenant ownership).
To add insult to injury, the bank will only take into account 50% of your rental income, which is actually shaved to around 80% (there is at least one lender that will consider 100% of your rental income!).
Luckily, there a select lenders that will consider your actual share in most joint liabilities and living expenses such as a credit card, a personal loan and a home loan.
Typically, this means that instead of being assessed at 100% of the joint debt, the bank will only take into 50%.
How much can I borrow?
Each lender is different!
- Some lenders may restrict lending to less than 80% of the property value while others will lend up to 95%.
- Some will ignore all liabilities of the non-borrower but will still factor in living expenses but particularly if you have dependents.
- Some lenders will not apply a common debt reducer for owner occupied properties meaning it only works when buying an investment property.
There are only a few specialist lenders that offer common debt reducer home loans.
Getting a great interest rate let alone getting approved comes down to presenting a strong case backed up with good evidence.
We can help you get approved!
Call us on 1300 889 743 or complete our free assessment form to speak with one of our specialist mortgage brokers.
How do I qualify?
The borrower and the non-borrower must be able to provide evidence of self-supporting income for their share of existing debts and liabilities usually in the form of:
- Your ast two payslips.
- Your latest Notice of Assessment.
- A list of your assets and liabilities (A&L).
- 6 months loan statements for your shared home loan.
Bear in mind that it’s not always a 50:50 split when it comes to home ownership.
With Joint Tenants, each party will have a 50% ownership.
With Tenants in Common, the split can be anything you decided with your solicitor when you first purchased the property.
This is common in co-ownership arrangements where you contribute three-quarters of the deposit while your co-borrower contributes a quarter, for instance.
You may also cover the bulk of the mortgage repayments.
In this case, the ownership may be a 75/25 split which means that you have 75% ownership of the mortgage. It’s still better than being assessed at 100% of the total debt!
In any case, a common debt reducer home loan is the same as any other standard investment loan.
Apart from proving your income position, all normal lending criteria will apply, including:
- Having a sufficient deposit: For the home loan as a whole, you’ll need to have a deposit of at least 5% of the property value as genuine savings. However, you can also borrow up to 105% of the property value using a guarantor.
- Purchasing an acceptable property: Most lenders have restrictions on property type and location. Check out the property types section and use the postcode calculator to find out more.
- A stable job: You need to have stable employment with at least 3 to 6 months working history.
- A good credit history: Although it will help your case if your credit file is clear of black marks like defaults, judgments, bankruptcies and a high number of credit enquiries, there are exceptions if you can build a strong case with the right lender. A mortgage broker can help you do this.
Why are most banks conservative?
Banks are always risk-averse and always look at applications in terms of “worst case scenario”.
The bank wants to know that you can afford both your and your partner’s current debt and liabilities should they be unable to produce an income.
That could be anything from job loss, injury or even death.
That’s why being assessed at 100% of large debts like a mortgage can stop your investment plans in their tracks.
This is the same reason that most banks only consider 80% of your rental income.
They see this as a sufficient buffer in case of market fluctuations that can cause high vacancy rates, tenants that don’t pay their rent on time and in the event that you had to sell your investment property.
Tips for improving borrowing power
To give yourself the best chance of getting approved:
- Cut out any unnecessary living expenses.
- Pay down any existing debts as much as you can.
- Close any unnecessary credit facilities, or at least reduce the limit.
Next, ask your non-borrowing partner to do the same.
In this way, you give yourself a better chance of maximising your borrowing capacity should you not be able to qualify for a common debt reducer solution.
Who is this loan for?
More often than not, we deal with husband and wife borrowers where one has decided to apply for a home loan as a single applicant.
There are many reasons why you would not want your spouse on the home loan:
- They have a bad credit history: Most lenders pay more attention to the co-borrower with the lowest credit score which can see your application declined or at the least see you hit with a higher interest rate.
- They cannot meet income evidence requirements: If your partner has just switched to being self-employed or has only recently started working again after maternity leave and cannot provide at least two years tax returns.
- They work part-time or casual: Not all lenders will accept applicants who work part-time or if they’re in a casual position because they prefer someone earning a regular income.
- Asset protection strategy: By having control over the mortgage and the property ownership, you may have a better chance of retaining your property in the event of divorce, although it’s essential you seek legal advice regarding this.
For these same reasons, a common debt reducer home loan may also work for:
- Siblings or other relatives.
- Work colleagues.
- Two or more sets of couples (for a home, investment or even a holiday house).
Will I have to pay a higher interest rate?
Some lenders that offer common debt reducer home loans are classed as specialist or non-conforming lenders.
These types of lenders are unregulated and approve risky home loan applications. Because of this, they will attach a risk fee to their interest rates.
So you could potentially be paying upwards of 2-3 percentage points on your interest rate.
However, there are some major banks and lenders that can help which means you can get the same interest rate as if you were a standard borrower!
Can I get all of the same home loan features?
Yes! You won’t restricted to a basic mortgage package and can apply for professional package that offers such features as:
Don’t put the brakes on your investment plans!
When building your real estate portfolio, having a good mortgage strategy is just as important as having a good property investment strategy.
As we’ve mentioned above, having a current mortgage with someone else can seriously affect your borrowing power if you decide to buy real estate on your own.
Because there are less than a handful lenders that offer a common debt reducer as a solution, that means there is less opportunity to shop around and get a great interest rate.
It also means you won’t be able to spread your risk across multiple lenders so you avoid exceeding mortgage exposure limits.
Want to keep building your investment portfolio?
Call us on 1300 889 743 or complete our free assessment form to discuss your situation with one of our specialist mortgage brokers.
We can tell you if you qualify for a common debt reducer home loan and also help you build a good mortgage strategy for your investment portfolio.