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How do banks assess rental income?

May 11, 2024

A collective sigh of relief with the RBA choosing to leave the cash rate on hold earlier in the week. Whilst this was widely expected a month ago, niggling inflation data in the last couple of weeks had many of us worried that they may choose to punish us some more.

With predictions about future rate changes becoming less certain, many are wondering if this pause in rate hikes will last. We seemed to be out of the rate hike woods only a few months ago, but now there is some speculation that the may be another rise before an eventual drop.

Solving this inflation challenge is clearly proving to be very difficult.

In this week’s newsletter, we take a look at the differences in the way banks view long term rental income compared to Airbnb, or short stay, rental income.

When assessing long-term tenant rental income versus Airbnb rental income for a home loan application, Australian banks employ different criteria to evaluate the stability and reliability of each income source.

Long Term Rental Income

For long-term tenant rental income, banks typically prioritise consistency and predictability. They assess the rental income based on the rental agreement’s duration, rental history, and the tenant’s reliability. Lenders may request rental receipts, lease agreements, or rental income statements to verify the income stream’s stability over time. Additionally, banks apply a ‘rental yield’ calculation to determine the property’s potential income generation relative to its value.

Airbnb Rental Income

In contrast, Airbnb rental income is considered more variable and less predictable due to the short-term nature of the rental arrangements. Banks may scrutinise Airbnb income by evaluating historical occupancy rates, average rental income, and property location. However, they may apply a conservative approach by discounting Airbnb income or considering it as supplementary rather than primary income. Lenders may also assess the property’s suitability for short-term rentals, taking into account local regulations, demand, and potential risks associated with seasonal fluctuations or changes in the tourism market.

Every lender has their own way of assessing the rent received from investment properties, but as a general rule, they will take 80% of the gross rental income as a contributing factor when calculating borrowing power.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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