Income from investments isn’t just secure and ongoing – it shows that you’ve got funds on standby and you’ve got the financial aptitude to manage your money well.
Unbelievably, not every lender will accept investment income when assessing your home loan application!
What investment income types will the banks accept?
- Dividends – ASX listed companies
- Dividends – Private company (conditions apply)
- Managed fund income
- Interest income
- Rent income
Not every lender accepts each income type!
Each will accept a certain percentage of that income and will have different verification requirements.
Do you need help getting your home loan approved? Call us on 1300 889 743 or fill in our free assessment form and our mortgage brokers will help you to get approved!
50%, 80% or 100%? It makes a big difference
Where most people get unstuck is that their bank decides to only use part of the income that they earn from investments!
While it is true that some investments are likely to fluctuate in the income that they generate such as a single listed share, it’s also true that an index fund is likely to deliver a very consistent dividend.
The same is true for fixed income investments or annuities which both have very stable incomes.
However, rental income has expenses associated with it, which is why most banks use 80% or less of the income.
- One or two of our lenders accept 100% of investment income (excluding rent).
- One or two of our lenders accept 80% of investment income.
- Most lenders accept 50% of investment income.
- Some lenders do not accept investment income at all.
So what happens if they don’t use all of your investment income when assessing your loan application? Their borrowing power calculator says that you can’t afford the mortgage!
This leaves a lot of investors scratching their head. Especially since in most cases they could just sell their investments and immediately repay the loan!
What can affect how much income they use?
Firstly, different banks have different appetites for working with investors. Some have lent too much money to investors in the past which has caused APRA to ask them to pull back on their investment lending.
However, let’s assume you’re working with a bank that wants to do business with investors. What will affect their assessment of your income?
- Borrowing over 80% of the property value may reduce the portion of your income that they use.
- Having less than a two year history of earnings may reduce the income they use.
- Not having completed your tax returns may cause some lenders to not accept any income.
- Capital gains income or other non-ongoing income may not be considered.
Keep in mind all lenders assess your situation in different ways, applying with the right lender is the key to success.
Call us on 1300 889 743 or fill in our free assessment form and we’ll work out which lender will assess your full income.
How can I prove my investment income?
There’s a variety of methods to prove each income type and each bank has their own lending policies.
Typically, you’ll need to provide print outs of your portfolio and two years’ tax returns.
That being said, some lenders can take an alternative approach, requiring just one year’s tax return.
Others will accept expected return, which is conservative at around 4%.
Despite this, it allows people who have just purchased their investments to get approved.
Did you sell the assets that generate the income?
Let’s say that your tax returns show dividends from your share portfolio. That’s great!
We can use that income to help you get approved.
What if you sold the shares to use as a deposit to buy a property? Then we can’t use that income to show that you can afford the loan!
This is a common problem and since banks ask for evidence of your shares as part of their assessment you need to make sure you include income from current assets only.
Dividend income – ASX Listed shares
How do banks assess dividend income?
- One of our lenders may accept 100% of your dividends.
- Dividends are considered to be relatively reliable.
- One of our lenders requires just one years tax return.
- Some lenders can use an ‘expected return’ if you purchased the shares recently.
- Having just one or two shares is seen as unreliable.
- Day trading and capital gains income is often excluded.
Overall dividend income from shares in listed companies is seen as low risk ongoing income and is easy to use when assessing your home loan application.
Dividend income – Private company
Are you running your own business?
As a general rule, banks will assess the overall position of you and your business. That means adding back your salary, dividends, super contributions, depreciation and NPBT.
Are you a shareholder in someone else’s business?
If your dividend income exceeds 25% of your total income then some banks will classify you as self employed.
Other banks may accept an accountant’s letter from your business accountant and then can keep it simple by just assessing your tax returns and personal situation.
This is seen as less reliable then income from listed companies as a private business cannot be sold readily, there is only one business, and you may not have control over the dividends if there are other owners.
Do you have an investment in multiple businesses?
If you have several private businesses which you have a stake in then it can get quite complicated to assess your income. There are ways to get banks to reduce the paperwork that they need and give you a quick and easy approval.
Call us on 1300 889 743 or fill in our free assessment form to find out how our specialist mortgage brokers can help you to get approved.
Managed fund income
Income from a managed fund is very reliable due to the spread of different asset classes and investments.
For that reason, we’re able to use historical dividend payments to prove you can afford a home loan. Normally, it is best to provide tax returns along with investment statements to show your current portfolio.
Be careful! Banks just look at any dividend payments, not capital gains
If your fund doesn’t make dividend payments, we may need to evidence the percentage of capital gains in the unit price that is attributable to dividends / interest income in order for us to get a bank to accept this income.
Note: High risk funds with high returns over 10% may not be included by some lenders.
Do you own fixed interest investments? They’re seen as some of the most reliable income sources but bear in mind that banks assess them in quite different ways.
- Is your interest received from a variable or fixed interest rate?
- What is the term of the investment?
- What is the type of investment? E.g. bonds, term deposit, savings account?
- Are you likely to get the same return when you rollover your investment?
- Is your return well above normal returns? If so, it may not be used in full.
- Do you have tax returns to show a history of returns?
In 2016, as interest rates dropped, this had a big effect on investors who had money in savings, greatly reducing their ability to use this income to apply for a loan.
In 2007, when interest rates were around 8%, it was easy to use interest income to prove that someone could afford a loan.
You’d think that since both savings and home loan rates tend to move up and down together that this wouldn’t have an overall effect.
However, banks have a floor serviceability rate that is used to assess your borrowing power! So when rates are low you’ll find you can borrow much less.
Royalty income is complex as there are many different sources of royalties and they each need to be assessed on their individual merits.
Typically banks look at:
- The past history of income and how variable it was.
- The likely future reliability of this income.
- If there are any other income sources to support the application.
- The percentage of royalty income that is needed to prove that you can afford the home loan.
Please call us on 1300 889 743 or complete our free assessment form and our mortgage brokers will let you know how your royalty income will be assessed.
Annuities have a guaranteed income and from a bank’s point of view it doesn’t get any better than that!
For this reason we can often look at the agreed returns and use this in our assessment. Typically 100% of this income is included.
The main problem is that most credit assessors in the banks have no idea what an annuity income is!
The low level assessors tend to be young and have never invested in one themselves. For us, it’s a simple matter of using our contacts to deal with someone more experienced to get your mortgage approved.
Is franking credit assessable income?
Yes, if the paid dividends are fully franked, it can be included in the income assessment by a couple of our lenders.
You can use franking credits in your income assessment, provided they are included in your personal tax returns and have been consistently received over 2 years.
Franking credits from both PTY LTD (private company) and LTD (public company) can be considered.
Typically, lenders tend to look at:
- whether the franking credit is likely to continue at that level for the life of the loan;
- The balance of the franking credit;
- Historic franking credits;
- Loan type and;
- The overall risk profile.
However, most lenders don’t consider franking credits as an assesable income source and the key is to apply with the right lender.
Is your bank ignoring your income?
Our mortgage brokers have many options available and can find the right lender that will assess your investment income.
In addition to this, we can often get past the low level assessors at your bank or present the right information to get your bank to approve your loan even if your bank manager said no!
Please call us on 1300 889 743 or complete our free assessment form and our mortgage brokers will let you know what options you have available.