The bank said no because of my deposit

It happens to almost everyone eventually.  You walk into the bank, ask for an amount of money, either to buy a car, house or business and the bank declines you.  Today we’ll look at what to do if the bank declines you for a home loan for your next investment property because you don’t have enough equity in your existing property or savings towards a deposit.

Typically, the three main questions a bank will ask is : 

The Deposit Hurdle

The deposit hurdle is probably the easiest to figure out.  This is uniform across all the main banks so you know you’re on even playing ground.  The maximum LVR (from 1st January 2019) any main bank can lend is: 80% on Owner-Occupied property and 70% on existing investment properties or 80% on new build investment properties.

(Note: you can borrow higher on Owner Occupied properties if it is your first home.  Once you start to buy investment properties, the banks will typically lend to an 80% maximum).

How have they valued your current properties?

If you have been declined because you don’t have enough equity, the first thing to find out is how have they estimated the value of your existing houses.  Is it by Council Valuation?  Is it by Desktop Valuation?  If it is, is that a true valuation of your property?  If you have done significant amounts of work to your property, it’s likely the value of your existing properties is higher and it’s time to think about ordering a Register Valuation.

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Registered Valuations for existing properties

When you are going to give the banks a Registered Valuation, it is important to order it through the bank system (ask your Adviser which system to use).  This is because, in years gone by, clients have chosen “more liberal” valuers or tried to influence the price.  These ordering systems confirm independence to the bank.  The downside?  You may end up with a very conservative valuer which may value your property lower than others would.  This is the unfortunate risk and the only solution is to reorder another valuation if you are unhappy with the first number.

Consider new-build properties

As mentioned above, main banks can lend up to 70% (from 1st January 2019) on existing properties and 80% on new-build properties.  You shouldn’t underestimate what a difference this makes if you are facing the Equity Hurdle.  Consider an example where you have a $500k owner-occupied home that has a $100k mortgage:

  • You can top-up to 80% of your own home, which in this case is $400k.  This is a $300k top-up which you can use as a deposit for your next investment property
  • $300k is sufficient deposit on an existing home worth ~$1,000,000
  • $300k is sufficient deposit on a newly built home worth ~$1,500,000

Obviously this example is subject to you being able to afford these amounts.  It is simply meant to show you how much more you can purchase buying new versus existing.

What constitutes a new-build?

To be a new-build property, the Code of Compliance must have been issued within 6 months of you purchasing the property.  You must also be purchasing directly from the Developer.

Go outside the banks

If you really want to buy an existing property but are being limited by the 70% LVR rule, there is another option.  The main banks are restricted to 70% maximum LVR but non-banks aren’t?  They can typically lend up to 80% on investment properties and there are 2 or 3 companies that will happily do this.  Their interest rates can be 1-2% higher than the main banks however if you have found a good opportunity, this may be a small price to pay.

A classic example of this might be if you have found an existing property that needs some TLC or repairs.  You calculate that with $50,000 of work, you can increase the value by $100,000.  The banks say no because you don’t have enough equity but you can get the mortgage from a non-bank lender at 2% higher.  Let’s say this comes to an additional $7,000 in interest per year).  Is it worth paying an additional $7,000 in interest to make $50,000 in profit (or $43,000 after additional interest)?

The goal may well be to increase the value of the house and refinance it back to the main banks once it meets the 70% LVR criteria - maybe in a year or two.

Get family help

It is very common with our first home buyers and increasingly so with our first investment buyers to receive help from family.  Receiving a gift from parents does not overly complicate the application to the bank if it is documented correctly.  Ideally, the money would be a long-term gift - repayable upon the sale of the property.  If it is a loan that requires regular payments, this may simply shift your hurdle from Equity Hurdle to an Income Hurdle.  If you are unsure how help from parents will affect your application, ask your Adviser to run the different scenarios.

You have options

For a problem that seems so concrete and immoveable, you actually have a lot of options.  In summary:

  • Make sure you understand how the bank is valuing your existing properties
    • Consider ordering a Registered Valuation
  • Investigate new build properties
  • Look outside the main banks for up to 80% LVR borrowing on existing properties
  • Discuss options with your family

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