If you’re looking to buy an Australian investment property, you need to be aware of how lenders will assess your borrowing ability especially for non-residents, foreigners and offshore Australian citizens/ PRs.
The main priority for any lender is your ability to repay the loan that they may approve for you. They will assess their level of risk of lending money to you based on checking the information you provide in your loan application against their lending policies. This risk increases for non-residents (aka foreigners) because Australian lenders are less able to verify the authenticity of their documents and the accuracy of their income and debt profiles.
While the specific policies of different lenders may vary, there are some general principles that apply. They will consider your income in relation to your expenses to determine your ability to afford your loan repayments.
It’s important to understand the difference between your gross income and your net income. Your gross income is the amount you receive before tax. It can include any or all the following:
- Your base salary/wages
- Any investment income you may receive (e.g. the potential rental income from your investment property)
- Overtime payments
- Any government benefits you may receive
To be useful for your loan application, you should be able to prove that any overtime payments, bonuses or commission that you receive are regular. If you are applying for a joint loan with your spouse, their income can also be included in your application.
Your net income is your gross income after tax has been taken out. It is often referred to as your disposable income because this is the amount you have available to cover your living expenses.
Australian lenders use net income as the basis for their home loan assessments.
Your living expenses can include things like:
- Your current mortgage or rent payments
- Any other credit repayment commitments you may have (e.g. for credit cards or personal loans)
- Food for you and your family (i.e. living expenses of your dependents)
- Telecommunications (e.g. your mobile phone and Internet plans)
It is anything that you regularly spend your money on. That money therefore wouldn’t be available for your loan repayments on an investment property.
Lenders in Australia will want to see that you have enough income left after covering all your regular expenses to cover your investment property loan repayments. They will usually ask you to complete an income and expense budget as part of the loan application process.
They will also often factor in a higher interest rate (aka an assessment rate) for your housing loan repayments. This is because interest rates can rise over time, and they want to make sure of your ability to afford your loan repayments if they do. In 2016, the Australian Prudential Regulation Authority (APRA) stated that prudent serviceability policies should incorporate a ‘serviceability buffer of at least 2 per cent above the loan product rate, with a minimum floor
You may be interested to read about the differences between how Singapore banks and Australia lenders assess your mortgage borrowing ability.
Different types of loans
There are different types of loans you can consider to make your repayments more affordable. For example:
- Fixed interest rate loans. You can fix your interest rate for a period to protect yourself against the risk of interest rates (and your loan repayments) rising. However, if interest rates fall, you’ll be locked into the higher rate. But interest rates in the Australian market are currently at historically low levels, so locking in a fixed rate could be good option.
- Variable interest rate loans. These rates will move up and down at the discretion of the lenders. Typically, Australian lenders use their own board rate or cost of funds as their base rate and give a discount. The net figure will be their mortgage interest rate. It is rare for lenders to use the Reserve Bank of Australia (RBA) cash rate as the base rate.
- Interest-only loans. This is where you only repay the interest for a set period, rather than the principal and interest. Your repayments are therefore lower and more affordable. However, the lending practices of financial institutions in the Australian market are monitored by the Australian Prudential Regulation Authority (APRA), and interest-only lending is currently capped at 30% of total new mortgage lending. Australian lenders discourage interest-only loans by charging higher rates. This move is designed to slow the take-up rate of interest-only loans, especially by investors. It is in line with other measures by Australian regulatory authorities to slow the property market and curb speculation.
Your income and expenses aren’t the only factors that lenders consider when assessing your loan application. They will also consider factors such as:
- Your credit history.
- The stability of your employment.
- Your level of savings.
- The deposit you can afford. The higher your deposit, the lower your loan-to-value (LVR) ratio and the less risky you are as a borrower from the lender’s perspective.
- The authenticity of your income and debt documents, especially for foreigners.
How we can help
Whether you’re looking for a new loan or to refinance an Australian property, we can provide detailed advice and assistance to help you gain approval for your application. We’ll take the time to understand your circumstances and provide the best Australian mortgage advice.
Contact us now to find out how we can help you!