My lender is putting on the brakes!
Has your bank pulled the plug on your investment plans? It is quite common for banks to be supportive when you buy your first couple of properties.
But once you have 3, 4 or 10 under your belt they start to worry about their exposure.
Investors hijacked low doc loans!
Banks created their low doc loans to service self employed borrowers that hadn’t completed their tax returns, or who had complex situations such as trust structures, and therefore could not obtain full doc loans.
Professional investors took up low doc loans in droves between 2000 and 2008. As the property market died down, banks started imposing ABN requirements which stopped professional investors from getting low doc finance.
The banks took this action because they were concerned about a small group of investors which were using low doc loans to finance speculative strategies that relied on growth in their properties to get approved for equity releases to then fund their repayments. Obviously this strategy doesn’t work if prices don’t rise.
What is an investor low doc?
Unlike a standard low doc loan, this is a loan specifically designed for professional investors who cannot prove their current income.
To qualify for this loan you must meet the following criteria:
- ABN / GST Registration is not required.
- Your stated income must be reasonable for your asset position.
- Your accountant must sign a letter to confirm that investing is your main source of income, how long you have been an investor and to confirm your declared income.
- Your investment income can come from shares, property or business.
- You can borrow up to 60% of the property value.
Do you need help to apply for a loan? Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will assess your situation to see if you qualify.
What if I can prove my investment income?
If you can prove your investment income from dividend statements, tax returns or rental statements then we may be able to apply for a full doc loan.
It really depends on the type, stability and duration of your income as to which lenders can assist you and how much you can borrow.
Don’t just assume that you need a low doc loan, let us assess your situation and work out your options.
What is wrong with borrowing too much from one bank?
Exposure, exposure, exposure. When a small investor becomes big then they find out that their exposure is a major concern for the banks.
If a bank has lent a large amount of money to one person and that person runs into financial difficulties, the bank has a lot more to lose.
Investors tend to take greater risks than mums and dads buying a home to live in, and so they represent a higher risk to the bank.
So as you can imagine, the banks are incredibly wary about someone using low doc loans to build a large property portfolio.
Mortgage Insurers such as Genworth Financial and QBE LMI tend to cap their total exposure to one borrower at $2,500,000 each. The banks can have exposure problems anywhere from $1,000,000 to $2,500,000 themselves.
We tend to spread out the risk between several lenders and Lenders Mortgage Insurance (LMI) providers to maximise the amount that you can borrow, allowing you to break free from the limits imposed by your bank.
What if my rent income covers my repayments?
Is your portfolio positively geared? Maybe it is, but not in the eyes of the banks.
Why is this so? Well, when banks assess your serviceability they usually use principal and interest repayments at a rate 0.5% to 2% higher than the actual rate.
They will also only use around 80% of the rental income to allow for vacancies, repairs and costs such as property management fees.
This can easily turn a positively geared portfolio into a negatively geared portfolio in the eyes of the credit manager.
However if you are borrowing less than 80% of the property value then one of our lenders will accept 100% of your rent income and will assess your current debts at their actual repayments. Please call us on 1300 889 743 or enquire online to find out if this is suitable for you.
Does the location of the property matter?
Many property investors with more than ten properties favour investing in mining towns or rural locations that have a high rental demand, making the properties positively geared. Unfortunately towns of less than 5,000 people have historically had populations that fluctuate wildly which in turn results in house price fluctuations.
Many banks or their mortgage insurers have put restrictions on low doc loans in remote locations because of this higher risk. The majority of lenders categorise postcodes into different risk categories and decline your loan outright if you are investing in an area that they don’t work with.
Don’t worry, not every bank has location restrictions. Although getting around location restrictions with a full doc loan is easier, it is still possible to buy in almost every area of Australia using a low doc loan.
Be careful and assess your own risk!
When you are building a portfolio of properties using an investor low doc loan, you need to be careful to make sure that you don’t overstretch yourself. We’ve seen some investors rely on increased property prices to release equity and fund their repayments, which is not a sustainable strategy.
As your portfolio grows you should reduce your Loan to Value Ratio (LVR) so that your portfolio remains close to positively geared. You may also want to fix the interest rate on some of your loans so that you can be sure that you are protected from RBA rate movements. Seek your own independent financial advice before making any decisions.
How can I apply for an investor low doc loan?
Our mortgage brokers can help professional investors like you to build their portfolio by finding the right lenders. Send us an online enquiry or call us at 1300 889 743 and we’ll find the loan that is right for you!