How much rental income will the banks accept?
Every lender has their own way of assessing the rent you receive from your investment properties.
As a general rule, lenders will take 80% of your gross rental income along with other income, such as your salary, to calculate your borrowing power.
Some will even consider proposed rent for a construction loan.
If you’re building an investment property, some will even consider which can greatly improve your borrowing power.
Coronavirus / COVID-19 update
Upwards of 10% of tenants have deferred their rental income in the current crisis.
As such some lenders are using less rental income in their assessment or are ignoring rent income if it is not currently being received.
You will need to provide the most recent 30 days as evidence of rental income.
Some lenders are shading rental income by up to 30% due to increased uncertainty caused by long periods of vacancy.
We can assist on a case by case basis, please call us on 1300 889 743 or enquire online to discuss your circumstances.
How do banks assess rental income?
Not all lenders assess your rent income in the same way. Some will only use 75% of the rent, and some won’t apply tax to the rent while others will.
In particular, many lenders differ on the way they assess negative gearing benefits and the assessment rates they use to calculate the impact of your current debt commitments.
Major banks and lenders tend to vary significantly in the amount that they’ll lend to property investors.
Why do most banks only accept 80%?
The reason lenders use only 80% of your rent is that they assume that 20% of the rent you receive will be used to pay for managing agent’s fees, council rates, strata levies, repairs and to cover for any vacancies.
However, each lender has a different policy, so it’s best to call us on 1300 889 743 or complete our free assessment form and our mortgage brokers will help you apply for a loan with the right lender.
Which lenders can accept 100%?
One of our lenders can consider assessing your loan using 100% of your rent income.
In addition to this, they’ll also assess your existing debts at the actual repayments rather than at a loaded assessment rate.
This drastically increases your borrowing power as an investor with positively geared properties.
How we can help!
Want to make all your rental income count? Contact us on 1300 889 743 or complete our free assessment form and our mortgage brokers will help ensure that all your income sources count!
My bank declined my loan because I’m "rent reliant"!
Did you know that earning too much rental income is considered to be a bad thing?
Successful property investors often hit a wall once they’re earning more income from rent than they are from their salary.
From a lender’s point of view, highly exposed investors tend to be high risk borrowers as they can be affected by market downturns more severely than normal home owners.
How much rent is considered "rent reliant"?
Below is an example of the “rent reliant applicant” policy of one of our lenders:
“Where significant portion of borrower’s income is derived from rent and the proposal is heavily reliant on rent, the application may be considered too rent reliant.
Level of gross rental accepted for servicing should not exceed:
- 40% of gross salary or wage for incomes less than $60,000.
- 65% for incomes $60,000 – $100,000.
- 70% for incomes greater than $100,000.”
If you’re classified as rental reliant then the banks may decline your application or only take part of your rent income into account when assessing your loan.
Did you know that not every lender considers rent reliance to be a problem?
Are you a professional investor?
We commonly help professional investors who have 10 to 50 investment properties and want to grow their portfolio.
There are three ways that we can help professional investors to prove their income and continue expanding their portfolio:
- 80% of Rent Income Method: This is the standard method used by most banks to assess rent income. One of our lenders can accept 100% of your rental income if you’re not reliant on negative gearing (positively geared investors only).
- Financial Statements Method: We provide the last two years tax returns or financial statements to show your actual profits from investing, rather than the bank’s “rule of thumb” method using only 80% of your rent income. One of our lenders can then assess your mortgage on its merits.
- Professional Investor Low Doc Loan: One of our lenders allows you to declare your rent income instead of providing rental statements, tenancy agreements and tax returns. This is helpful if your situation is complex or if you cannot prove your full income.
Which method is right for you?
We usually complete an analysis of your situation and then go with the option that will give you the best possible outcome, i.e. to reduce your interest rate or increase your borrowing capacity.
Our mortgage brokers are specialists in the rent income policies used by the banks.
Are you renting to your family?
Many investors decide to buy investment properties close to their own home and then to lease them out to their extended family.
By keeping it in the family, you can reduce your risk of having troublesome tenants and enjoy having your family close by.
Unfortunately, many people who rent to their family have a hard time proving the rent income that they earn as there is no managing agent and often no formal tenancy agreement in place.
Which lenders can help?
We know which lenders will take these factors into account and may accept alternate evidence of your rental income.
In most cases, the banks will require a letter from your family, tax returns or a transaction history showing credits to your bank account.
Do you have a housemate or sub tenants?
First home buyers that want to buy a 2 or 3 bedroom home but don’t have the income to afford it may lease out a room to a friend. Technically, this is known as “leasing to a sub tenant”.
Again, this can cause trouble when applying for a loan as many lenders don’t take any rent from flatmates into account when assessing if you can afford a loan.
In this situation, getting a home loan usually depends on:
- The percentage of the property value you’re borrowing.
- How reliant you’re on the income from your flatmate.
- What evidence you can provide to show the rent income.
These situations can be tricky, so please call us on 1300 889 743 or complete our free assessment form to talk to our mortgage brokers about your rent income.
Does your property allow for dual occupancy?
We commonly have applicants that have a property that has two dwellings on it, often in the form of a duplex, granny flat, house that has been converted into multiple units or a block of land with two houses on it.
Proving the rent income from these types of properties is generally not a problem as in most cases, formal tenancy agreements are in place.
Is rent to buy and vendor finance available?
Vendor finance, wrap strategies and rent to buy schemes have become increasingly popular in recent years, particularly with investors that follow Steve McKnight or other popular property investment writers.
One of the biggest problems that these investors have is that as their portfolio grows, banks begin to say that these investors cannot afford their level of debt, even though in actuality most of the properties are positively geared!
This problem stems from the way lenders assess loans. For more information or to apply for a mortgage, please contact us on 1300 889 743 or complete our free assessment form today!
How do lenders assess these loans?
They may assess your repayments at principal and interest over 30 years at an interest rate that is 1.5% to 3% higher than the actual rate that you’re paying.
How much of this income do lenders accept?
Most lenders only take 80% of your wrap income into account and ignore that your tenant is paying for council rate and other outgoings. As a result, your investing grinds to a halt.
Some lenders aren’t as conservative with investors earning wrap and rent to buy income.
What if I don’t own the property yet?
Most lenders will be able to use the proposed rental income of the property that you’re buying. They’ll either ask for a letter from the real estate agent to confirm the market rent income or they’ll use the rental figure estimated by the bank valuer.
In most cases, the bank valuer will have a more conservative figure. Where the bank has both a letter from the agent and a bank valuation they’ll use the lower of the two figures when calculating your ability to repay the loan.
What if my property is being built?
Not all lenders will allow rental income to be included if your property is being built.
- Vacant land: No lenders will include rent income.
- Ready to build: Some lenders will assess rent income on a “To Be Erected” house if you have a construction contract in place.
- During construction: Some lenders will assess the rent income, but only if they are the lender that’s providing your construction loan.
Again, your rental income can be proven with either a letter from the agent or the bank valuation.
What if my property isn’t currently rented out?
It’s common for people to keep their current home as an investment property when they buy a new home. Often to prove they can afford the new home, they need to get the bank to assess the proposed rental income from their current home.
In most cases, people refinance their home when they buy a new home so we often have a bank valuation on hand as evidence. However, not all banks will trust your plans to rent out the property and may ask for additional evidence.
In other cases, such as when you have just renovated an investment property it may not yet be rented. Depending on the bank, they may wait for the property to be rented out before they will include this income in their assessment.
Apply for an investment loan now!
We are mortgage brokers that specialise in finding solutions for people who are in situations that are outside of the box, and for investors that earn rental income that’s difficult to prove or doesn’t meet standard guidelines.
If you’d like to know how we can help with your home loan then please call us on
1300 889 743 or fill in our free assessment form. Our mortgage brokers are experts in helping people get the most out of their income sources and will help you get the best rates available!