Borrowing with a rental guarantee income
Borrowing with a rental guarantee income
A borrower source of income is one of the prime factors that the banks take into account when determining whether they should lend to you. This is because, they can determine if you are equipped to repay the loan amount, based on your earnings. But, in today’s society, income is increasingly varied.
Not everyone works 9-5 and earns a standard salary. Some people are contractors, earn high bonuses, receive a shift allowance or work on a commission basis. Then there are those that receive rental income, through a rental guarantee.
But do the banks accept rental guarantees as a legitimate form of income? If you are looking to borrow, based on this income type, please read on.
Rental guarantees: what are they?
As the name implies, a rental guarantee is where the owner of the property has a guaranteed right to receive rent for a fixed period, without worrying about finding alternate people to fill gaps in occupancy, or late/missed payments.
What kinds of properties have rental guarantees?
The main property types with guaranteed returns are generally leased to government agencies, who then rent the properties out to certain tenants. Some of the properties include ‘housing commission’ rentals, to those whose rent is subsidised by the Department of Housing.
Other properties include Defence Housing Australia rentals, which are managed by the Department of Defence.
Additionally, some developers have a rental guarantee for off the plan units or apartments.
Some display can also be purchased by an investor and then rented by a builder for the duration of its use as a display home. This is generally until all the houses in the surrounding area are sold off.
How much will the banks lend?
Investors that receive a rental guarantee may be entitled to borrow up to 95% LVR of the property that they wish to purchase. If you are a low doc borrower, you may only be entitled to borrow 80% of the purchase price.
Are the banks stricter than usual?
As a rental guarantee is not a conventional form of income, banks have more conservative lending practices. Most banks believe that whilst the income is fixed, there is an added risk involved due to the technicalities associated with the assurance.
Most rental guarantees are also subject to a caveat on the property that protects the tenant’s interests. This means that if an investor wants to sell his property tomorrow, but there is a rental guarantee in place, the new buyer must be willing to continue renting that property out for the term of the tenancy.
Consequently, these properties may be harder to sell and may sit on the market for lengthy periods before attracting a buyer.
Advantages and disadvantages of a rental guarantee
A rental guarantee is great for investors who want to rent a property out, but are concerned that their tenants will not pay their rent on time or will prematurely terminate the lease.
The guarantee prevents these situations from occurring and therefore, the investor is not at risk of losing money. These guarantees are particularly strong when given by government agencies and departments
However, rental guarantees are still subject to cancellation, therefore, most lenders may not consider the rental guarantee, despite the lengthy term of the lease.
Banks are more likely to consider the current market value of the rent and determine the rental income you receive, based on that value. They are less likely to consider a rental guarantee.
To maximize your chances of approval, it is important to have other income sources, in addition to a rental guarantee.
It really is a peonsral choice but most landlords go down the interest only route. Unlike your own home, you can sell the property at the end of the mortgage to repay the debt without leaving yourself with nowhere to live! The other reason for landlords taking this route is that in the current climate the rental income is often not sufficient to cover the cost of a repayment mortgage plus the other costs.The main question you should ask yourself is whether you want capital growth (to see the money you invested grow) or monthly income. If you are after monthly income then you should go for interest only as this will give you the lowest payments and the most money in your pocket each month. I am a financial adviser and we own 5 properties ourselves and do not make much money on the monthly income but we are in it for the capital growth over the longer term. Yes we may have mortgages on the properties and therefore don’t own the entire property in effect but we do own the part that is unencumbered (without mortgage). An increase in value in the property is what we are after. We have a couple of properties on repayment as they have much lower mortgages on them allowing the rent to still cover the payments but the others are interest only. As remember, you will need to have approx. 15% deposit and I would recommend having at least 6 months rent put aside for any time the propertyis empty or maintenance issues.
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