Assistance with Investment Property - Broker has provided an unusual solution

Sshanaz on 03/03/2016 - 12:45

I own a house and now I want to purchase an investment property however the current financials do not allow it. I spoke with broker and they told me the only way for me to get the required loan is by telling bank:
1) I would be renting my existing property where I live and move out
2) I would also rent out my newly purchased investment property
3) I would rent out a separate property to live

Once the settlement takes place, it would be change of mind and I would continue to live in my existing property (I never move out) and I don’t need to tell bank about change of mind either as long as I could meet payments.

I am bit concerned about this approach. Wouldn’t the bank ask me to move out of existing property before the settlement?
What is your suggestion and cons of this approach?

Financial

Comments

  • CyberMurning on 03/03/2016 - 12:59

    gee. bank will not ask you to move out.
    broker is fine, common practice not ideal but as long you are sure you can afford the repayment each month. dont just use today interest, let say mortgage rate increase to 8%/year, are you still ok? if yes, then go ahead…

    basically it is trick to increase you income. as now many renting income is higher than repayment - not all, some. and not much. but still maybe your broker think every dollar can help you get a loan so why not

    • Sshanaz on 03/03/2016 - 13:02

      I am very confident that I could afford it but unfortunately my financials due to dependents reduce borrowing capacity significantly.

  • sweefu on 03/03/2016 - 12:59
    +4

    1. Don't buy an investment property if you can't actually afford it.

    2. Most banks will require some confirmation that you've rented out your current house, eg. Signed lease, utility bill for your new rented home etc.

    • CyberMurning on 03/03/2016 - 13:01

      ups.. really? ask for proof? hmm never heard of this but dont quote me..

    • Sshanaz on 03/03/2016 - 13:02

      I would provide them rental estimate letter from real estate which would give indication that I am renting it out.

      • sweefu on 03/03/2016 - 13:04

        I get that, and this is a pretty standard thing for a broker to recommend.

        However, we recently had a deal with similar circumstances (but the applicant was actually moving out of their house), and the bank required a signed lease/utility bill to confirm they were actually moving out. This was a big 4 bank.

        Again, if you need to do this to service the debt you should really examine whether you can currently afford it.

        • CyberMurning on 03/03/2016 - 13:14

          Agree but banks too tight and not flexible for example people with high credit card limit will affected hard. But actually some people just use high limit to get free loan money from Citibank, cheque to self, and always pays off at due date.

        • maximum on 16/03/2016 - 21:11

          You can say you are moving in with your parents - no lease or utilities

  • paulf on 03/03/2016 - 13:16
    +4

    Lenders/brokers are covered by federal legislation and are required to be " responsible "-Ie: not lend to someone who can't afford a loan.

    As you stated - you can't afford it on paper and this exercise is a means of getting around the lenders requirements.

    It would only take something to go wrong - one of the children getting seriously ill for example.

    Negative gearing changes are being discussed on a political level and could affect the situation also.

    In the end it is your call.

    • naritas on 03/03/2016 - 14:54
      +3

      +1 to this comment.
      As a general rule, all credit providers and credit intermediaries (brokers) should only be officially recommending a mortgage commitment that is 'not unsuitable' (ASIC's term not ours). This scenario does not have the hallmarks of being able to be described as not unsuitable. Similarly, they are obligated to make reasonable enquiries into the borrower's ability to repay the debt, which means that they shouldn't be officially recommending a loan that is likely to put a consumer into mortgage stress. Mortgage stress is defined as a situation in which homebuyers are paying more than 30 per cent of their disposable income on home loan repayments. (Source: National Centre for Social and Economic Modelling, University of Canberra).

      Furthermore, we really hope that your broker is not encouraging you to intentionally lie to game the system. It would be a breach of their obligations under the NCCP Act, grounds for termination from their professional body (likely the FBAA or MFAA), and grounds for revocation of their lender accreditation.

      They may, however, be talking generally (i.e. not a recommendation - official or otherwise) about how people are achieving these seemingly miraculous approvals for loans that are unaffordable for the sake of perspective. The other posters here have given you that kind of perspective, and a good summary of the truth of the matter, which confirms what your broker has said i.e. 'people do try to withhold information from their lender to get approvals and occasionally it works'. But as the adage goes, just because you can doesn't mean you should.

      Hope this helps.

      PS If you want a link to a free mortgage stress calculator please send us a PM.

  • Sshanaz on 03/03/2016 - 13:24

    Thank you for your feedback so far. What is the probability of bank asking me to provide evidence of renting out existing property before or after settlement?

    As I said, I can afford it but I don't want to loose my deposit or last minute hassle just because the bank wants me to move out before settlement which practically is never gonna happen.

  • MJ1 on 03/03/2016 - 13:53

    Probably a different angle, but the broker is telling you to lie (and sure, there are lots of justifications around this, but at the end of the day it's still a lie).

    I'm far from perfect, but my goal is to live honorably. Have you asked yourself how much your integrity is worth?

  • jabroni on 03/03/2016 - 14:05

    really? investment property right now is risky as hell given all the political talk

    • Sshanaz on 04/03/2016 - 07:47
      +1

      Really? If negative gearing is going off the list, isnt it the good time now to buy investment property?

      • jabroni on 04/03/2016 - 13:24

        well hard to say given each state is different but if investors smell fear in sydney then i can see sudden selling off to maximise profit now and then negative gear into newly built homes that will start to attract more interest

  • tomleonhart on 03/03/2016 - 14:28
    +1

    Broker here.

    The reason your broker recommends this is to factor in rental incomes for both property thus increase you borrowing capacity.

    I never recommend this practice because effectively you'll have to lie about your real circumstances. Plus you'll have to somehow come up with a reason good enough for bank to believe that your payment for the rented house will be lower than your rental income. E.g. you rent a place for $500/week and your investment property are leased out for $600/week.

    And no, bank can't force you to move out.

    Upside: you can borrow.
    Downside: you're paying a higher interest rate as investment property.

    I don't even want to go into how you're going to afford it. Unless you are receiving cash income.

    • sweefu on 03/03/2016 - 14:33
      +1

      Disagree on one point; they probably won't pay a higher interest rate.

      Debt on home is already set at owner occupied rates.

      New investment property is going to be investment rates regardless.

      • tomleonhart on 03/03/2016 - 14:48
        +1

        Righto. I was coming from the perspective that OP will move both loans to another bank.

        • sweefu on 03/03/2016 - 15:12
          +1

          Fair point. Also if their broker is encouraging them to lie about living situation, they are almost definitely trying to get their whole portfolio (if they didn't set the original debt).

  • 2jzzzz on 03/03/2016 - 15:07
    +1

    This is how we get financial crisis'. Go watch The Big Short.

  • [Deactivated] on 03/03/2016 - 15:38

    In my opinion, we are obligated to act legally, not morally.
    I didn't meet loan criteria, so an accountant friend suggested this:
    Brother-in-law hired me to do work for him at a wage which allowed me to qualify for the home loan. Do I need to say more? All worked out.

    Fairly similar to your brokers methodology I think. You might even try this extra weekend wage idea instead. If a helpful friend is willing to help out.

  • mskeggs on 03/03/2016 - 17:56
    +1

    The worst outcome if you are right is you have to produce a document saying you are renting or paying utilities.
    Do you have a friend or relative who could add you to the lease then later remove you, or who would transfer the power bill into your name?
    This would only be needed if the bank insisted. This would cost a few hundred dollars at worst.
    If this failed, you could ask the agent you are buying through or who you intend to let the investment if they could arrange a lease on a premises they manage that is vacant or soon to be vacant that was a week to week lease, that you could sign then immediately terminate? The agent would be motivated to help, and you could offer them a lease 'preparation fee'.
    Or do you know somebody who would agree to rent out their spare room to you to similarly satisfy the requirements?

    Personally, I would not do any of this, and instead look for a different lender. If there were no alternatives, I would consider it fairly strong evidence that it might be a better idea to wait and save some more deposit.
    What would you do if your tenant stopped paying rent and it took 4 months to evict them, for example, if the finances are so tight?

    And the obvious follow up to my opening line is the worst outcome if you are wrong and cannot service the debt is you lose your house, your investment your savings and are declared bankrupt. If interest rates went up just 1 percent next year, and property prices fell just 5% you might have this problem I would suggest.

    • Sshanaz on 04/03/2016 - 07:44

      You have made me to think about future tenants though I do have fair bit of savi gs in my offset account.

      BTW one bank is doing house valuation and they want to inspect property. My street has 40 houses and my house comes in top 5 but should I still consider anything to ensure the valuation comes fair?

      If their valuation comes very low, the invesetment property is off the list.

      • mskeggs on 04/03/2016 - 07:52

        I don't know anything about valuations, there are others here that do.
        You might also look at the Somersoft forums that talk a lot about real estate investment.

        • Sshanaz on 04/03/2016 - 08:08

          The forum looks good so thanks for sharing!!

  • modsec802 on 03/03/2016 - 18:21
    -1

    And this is why we have a housing bubble in Australia

    • mskeggs on 03/03/2016 - 18:34
      -1

      Sure, but this kind of leverage is what is going to make some property affordable when the forced sales happen. Fortunately/unfortunately, you can grow old waiting for a correction in property prices in this country.

      • Sshanaz on 04/03/2016 - 08:01
        +2

        I agree - the best time to buy is when you are ready to buy. Don't wait to save, save and save for your dream home.

        Here is my personal experience- I was looking for brand new 3 bedroom house on 350sqm block in 2013 with 28k deposit. Bankwest approved me for $330k. As the property price was $400k, I was supposed to organise 42k.

        My parents agreed to give me 42k but they needed 3 months and I lost the race here. I could have settled for already built 3 bedroom townhouse for 350k but I was foolish to be only after brand new property.

        Consequences The same 350k townhouse is now worth 475k. I not only lost 125k but also paid additional 125k to purchase existing property in 2015 (brand new was far out of reach). It is best to buy whenever you have some deposit. If you keep on waiting to save deposit for your dream house, it might take you decades or you might never reach there due to price increase.

        • danyool on 17/03/2016 - 14:09

          And just in case you need an alternative view:

          This person - bought in Gladstone August 2012
          Purchase price $414,000
          Value today $320,000
          Loss of $94,000

          And - to rub the salt in I was told the rent would be $500-$550

          It was rented for $330 pw for a year
          Now it rents for $250 pw atm

          It is negative cashflow of around $18,000 per year

          So, it's not all roses.

          https://propertychat.com.au/community/threads/post-your-wors…

  • affable on 04/03/2016 - 07:47
    -2

    Thanks for sharing this, now I know how so many Australians get to play monopoly with our housing market. All is fine, while they all have jobs.

  • dandandan on 04/03/2016 - 08:20

    If you can afford it and your going to do the dodgy, why not add a bit more dodginess and just say your moving in with family/ relatives to save some more and pay no rent while renting your principal home out as well.

  • kuhari on 04/03/2016 - 10:49
    +4

    I worked in home loans for a bank for 6 years. In a part of your loan documentation you will have to sign a document stating you intend to use both properties for investment purposes, this declaration covers the first 6 months of your loan. If you fall into financial hardship in the first 6 months & it is discovered that you lied on your declaration, you can face fraudulent charges as it is a legal document.
    Aside from that, I would personally not borrow an amount that the bank wont lend, as they stretch your maximum borrowing power enough as it is, & there needs to be sufficient room left to cover interest rate rise fluctuations.
    Sounds to me that you need to go to a different broker that has your personal and financial security needs more in mind as first priority instead of their sales targets.

  • Sshanaz on 17/03/2016 - 14:55

    I have decided not to proceed with IP at this stage.

    • Thenarrator on 09/04/2017 - 15:28

      Whats the outcome now? has your view remained/stayed the same?

      • Sshanaz on 09/04/2017 - 17:04

        I didn't end up buying.

        • Thenarrator on 10/04/2017 - 00:39

          did you still keep at eye on property now? regret not buying or still patiently waiting for the right time? or forgot about the property market altogether?

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