The banks take your income into consideration when assessing your ability to repay the loan. However, in today’s society, income is varied and comes in many different forms.
So, if you are receiving rental income on a property that has a ‘rental guarantee’, how will the banks view your income? Read on to find out more.
What is a rental guarantee?
A rental guarantee provides owners with the assurance that they will continue to receive rent on their property.
Many investors choose to buy properties with a guaranteed rent return so that they do not have the risk of vacancy, missed rent payments and in some cases they also avoid property management fees.
Generally government guarantees are in line with the market rent, have no management fees or expenses paid by the investor.
There are several main types of properties with guaranteed rental returns:
- Department of Housing (Housing commission) rentals.
- Department of Defence / Defence Housing Australia (DHA) rentals.
- Off the plan units with a developer’s rental guarantee.
- Display homes sold to an investor then rented back to the builder until the rest of the houses in the development are sold.
How much can you borrow?
- First home buyer: Not applicable
- Investor: 95% of the property value or up to 105% using a guarantor (conditions apply).
- Low doc: 80% of the property value.
- Discounts: Competitive professional package and basic loan discounts are available.
Note: Many lenders decline loans for properties with rental guarantees. Others may use the market rent only when assessing your ability to repay the loan, not the guaranteed rent which is often higher.
Why are the banks so conservative?
Most people consider a guaranteed rent income to be a good thing! And usually it is, however to a bank a rental guarantee may pose a higher risk.
This is because most rental guarantees come with a caveat lodged on the property to secure the tenants interests. In other words the property is “locked in” to that tenancy and if sold must be sold to an investor who wants to continue to rent it out. As a result properties with a long term tenancy over 3 years may take longer to sell.
Government guarantees from the Department of Housing or Defence Housing Australia may pose little problem as the rent is usually paid on time. Please visit our page to find out more about getting a DHA home loan.
Developer and builder rental guarantees are often at above market rates and are built into the sale price, so ultimately you end up paying for the guaranteed rent anyway.
There are several cases of the rental guarantee being cancelled a year or so after the purchase, so lenders tend to assess your ability to repay the loan using the market rent, not the guaranteed rent.