How is rental income treated?
Welcome to the finance update for the week ending 5 August, 2023.
Another sigh of relief for borrowers earlier in the week with the RBA electing to keep the cash rate steady, making it two months in a row of no change. Does this mean that interest rates will remain steady for a while now? We’d like to think so, it would be nice to have some stability to allow people to regroup financially.
With virtually no changes to interest rates by lenders for the week just gone, this could be a sign that they too are comfortable that the RBA will cease turning the screws for a while!
In this week’s newsletter, we take a look at how lenders assessment rental income as part of a loan application.
How much rental income will the banks accept?
The amount of rental income accepted by banks varies depending on each lender’s individual criteria for assessing investment property income and calculating borrowing capacity. Generally, lenders will consider 80% of your gross rental income, along with other sources of income like your salary, to determine how much you can borrow for a new home loan.
How do banks assess rental income?
It’s essential to note that not all lenders assess rental income in the same way. Some may use 75% of the rent, while others might exclude tax from the rental income calculation. Additionally, the treatment of negative gearing benefits and the assessment rates for your existing debt commitments can vary between lenders. As a result, major banks and lenders often differ significantly in the amounts they are willing to lend to property investors.
Why do most banks only accept 80%?
The reason most banks use only 80% of your rent is that they anticipate approximately 20% of the rental income will be allocated to cover managing agent’s fees, council rates, strata levies, repair expenses, and any potential periods of vacancy. This assumption ensures that the bank considers the potential costs associated with maintaining the investment property, thus arriving at a conservative estimate of your actual disposable income.
As lending policies differ among institutions, it is advisable your clients speak with us so we can help them navigate the complex landscape of rental income assessment and find the most suitable lender based on their unique financial situation and investment goals.
If any of your clients would like more information about how their rental income will be assessed, please have them call us on 1300 366 296.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
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.