The Bank Declined My Investment Property Mortgage Application – Equity Hurdle

Date Published: 1 April 2023

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

• “What LVR (Loan to Value Ratio) are we lending to?” (Equity hurdle)
• “Does the applicant earn enough money?” (Income hurdle)
• “Does the applicant have good character?” (Credit hurdle)

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. Generally, the main banks can only lend up to 80% on owner-occupied properties, 60% for existing building investment properties, and 80% on new-build investment properties.

They do have some capacity to lend up to 90% for owner-occupied properties if it is your first home. This of course isn’t relevant if you’re a property investor.

Note: occasionally some banks can lend up to 90% on new-build investment properties.  It’s worth talking to your mortgage adviser about what the current rules are.

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 either of those, is that a true valuation of your property? If you have done significant amounts of work to your property, or if it’s been a while since you had it valued, it’s likely the value of your existing properties is higher and it’s time to think about ordering a registered valuers report.

Registered valuations for existing properties

When you are ordering a registered valuers report, it is important to order it through the bank system (ask your broker which system to use). This is because, in years gone by, clients have chosen “more liberal” valuers or tried to influence the outcome of the report. These ordering systems confirm the independence of the bank. The downside? You may end up with a very conservative valuer who may value your property lower than others would. This is an unfortunate risk and the only solution is to reorder another valuation if you are unhappy with the first number and can’t get the valuer to budge on the assessment.

Consider new-build properties

As mentioned above, main banks can lend property investors up to 60% on existing properties and 80% on new-build properties. This is a big difference when 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 the sufficient deposit on an existing home worth ~$1,000,000
• $300k is the 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 home?

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

Go outside the banks

If you really want to buy an existing property as an investment but are being limited by the 60% LVR rule, there is another option. The main banks are restricted to 60% 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 60% 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 an equity hurdle to an income hurdle. If you are unsure how help from parents will affect your application, ask your broker to run the different scenarios.

So, if the bank declined your investment property application because of not enough deposit, you still have options

For a problem that seems so concrete and immovable, 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 valuers report
• Investigate new build properties
• Look outside the main banks for up to 80% LVR borrowing on existing properties
• Discuss options with your family

Are you looking for investment property?

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