Investment income can provide a welcome boost to your borrowing power, but it’s just one alternative source of income that lenders may use when assessing your loan application. We take a look at some other sources of income your lender might consider, and what they’ll want to see before they take it into account.
Aussies love to invest. Over 6 million of us own shares or listed investments while another 1.7 million own an investment property. But investment returns and rent are not the only sources of additional income that lenders may consider. A third of working Australians rely on an annual bonus to boost our earnings, and more Australians than ever are tucking some of their hard-earned cash away as savings. When it comes to getting a home loan, these can all add up to better borrowing power.
Not every lender will accept every alternative source of income, “They are looking for the consistency and the historical evidence that you are going to receive the income”, says Aussie broker Nick Egan. Your Aussie broker can guide you on which lenders are right for you.
Bonuses and Commissions
If you’re working in sales, you may be paid a monthly commission as part of your overall remuneration. Banks will consider regular commission payments when assessing your borrowing power. This detail is usually included on payslips, and rates listed in employment contracts, making it easy to demonstrate that they are a regular and ongoing part of your income.
Bonuses tend to be subject to more discretionary targets, and they are generally paid less frequently but some lenders are happy to accept them as part of your income.
Lenders will usually want to see several consecutive payslips or a letter from your employer confirming your bonuses are likely to continue. They may also want to see a recent tax return or group certificate.
Dividends as investment income
Returns from investments such as shares or managed funds don’t just provide ongoing income that your lender may consider. They may also consider that your investments are a potential source of cash should you need it in the future. Your investments may also show that you’ve got the financial ability to manage your money well.
A quick glance at any of the major banks’ online calculators shows they will include dividends as income. As lenders are looking for evidence of reliability, whether investment returns will boost your borrowing capacity will depend on the size of your portfolio and how regularly you trade.
Dividends are normally paid twice a year, and lenders will be looking for evidence of payment, most likely in the form of a dividend – or distribution – statement, as it’s a legal requirement for companies that pay dividends to issue them. Lenders will also want to see at least one but possibly two years of tax returns.
Bonds, savings and term deposits
Terms deposits are long term, interest-paying investments usually issued by banks, building societies or credit unions. Cash is invested for a fixed term and a fixed rate of interest is paid over that term, making them a reliable, lower risk investment.
Government bonds are also highly secure, low risk investments that earn a fixed rate of interest for the period of ownership, making them reliable sources of income when a lender is assessing your home loan borrowing power.
Variable interest earned on savings and other everyday accounts will also generally be taken in to account. However, with interest rates in Australia dropping below the rate of inflation this year the impact on your borrowing power is likely to be low.
Be prepared to provide at least three months of recent account statements, and one to two years of tax returns as proof of this additional income.
If you own an investment property, lenders will include rental income when they’re assessing your borrowing power. Keep in mind that many will only include 75% of the total income because of the costs associated with maintaining the property.
If the rent you earn from your investment property outstrips what you earn from your salary, some lenders may view an over-reliance on rental income as high risk. It could mean lenders only include a smaller portion of the total rental income when assessing your borrowing power.
Lenders will often request a detailed letter from a managing agent confirming the current or expected market rate for your rental property as evidence of this income.
Other sources of income such as annuities or royalties may be taken into consideration by lenders but they tend to be complex and varied and need to be assessed individually.
Musicians, for example, can claim writing and performance royalties though copyright agencies that act on their behalf. They are usually paid every three months and the agency will supply a royalty statement as proof of income.
As with all sources of income, lenders will be looking for evidence that royalty payments are genuine and reliable.
Does my self-managed super fund count?
The short answer is no. Unless you’re already retired, any income you get from your super fund doesn’t count towards your borrowing capacity.
Self-managed super funds (SMSF) can invest in property, but it’s not simply a case of buying a place and watching the rental income roll in. Superannuation, self-managed or otherwise, exists to benefit fund members in their retirement.
So, using an SMSF to buy property is not a way to boost your personal borrowing power. Under the ‘sole purpose’ test, any investment, and what it earns, must only benefit the fund, not you or your family’s lifestyle. That also means you can’t use your SMSF to buy a holiday house or redecorate your home, nor can buy your brother’s house and let him live there rent free. In short, rental income needs to be kept separate from your personal financial affairs.
You will only benefit from your SMSF property investments when you retire. Favourable income tax and capital gains tax rates however, as well as the continued growth in Australian property prices mean property is still one of the top three investments for Aussie SMSFs. Just don’t count on it to boost your personal borrowing power before then.
Alternative sources of income could provide a boost to your borrowing power. As different lenders assess additional income differently, finding the right lender for you can depend on how you earn it. Talk to your Aussie broker today about finding the right deal for you and make sure every cent counts.
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