Real Estate

Why paying rent doesn't mean you can afford a home loan

Why paying rent doesn't mean you can afford a home loan

So, you've been renting for years and you've finally managed to save a home loan deposit.

Better still, the mortgage repayments on your dream house equal what you currently paying in rent, so your lender should give your pre-approval the green light, right? 

Think again - and further around the corner.

Why your rental payments don’t mean you can afford a home loan

Put simply, your rental payments don't equal the full amount you need to service a long-term home loan.

And we're not talking about either one-off, or ongoing, charges such as stamp duty, council rates, insurance, body corp fees, and maintenance.

It all comes down to what's known as serviceability floors or buffers, otherwise known as assessment rates.

This rate is a higher interest figure than the one that lenders will actually offer you and they will judge your ability to service a home loan based on this higher figure - not the one you'll see on their website.

Why?

The higher rate reassures the lender that even when the national cash rate rises (as it's doing now, more's the pity), you as the borrower can still pay your loan.

In other words, your current rental payments don't equal your potential mortgage repayments after all.

NB: as we explained recently, the Australian Prudential Regulation Authority (APRA) increased the serviceability assessment buffer to 3% in October 2021 (up from 2.5%), thereby giving borrowers less chance of buying.

At the same time, being harsh now isn't necessarily a bad thing as the 3% figure means that if rates do rise, borrowers can still afford higher repayments.

How your rental payments can still assist your home loan application

Before you get depressed, there are several ways in which your tenancy years can help with your home loan application - including your borrowing capacity, savings, and credit score.

As well, lenders will definitely take your rental payments into account when looking at your home loan application.

But depending on the lender, they won't calculate your rental payments as an easy fix for paying your future mortgage - rather, they will note it down as potential income on your application.

NB: feel free to double-check with your lender that this change is definitely part of your application as it will most likely make a major difference - in the best of ways! - to it.

Let's take a look at other rental benefits to home ownership.

Why paying rent doesn't mean you can afford a home loan
There are several ways in which your tenancy years can help with your home loan application. Showing you've always paid your rent on time shows you have the financial discipline and experience needed to meet potential loan repayments.

Strong rental history

As with every point in your financial past that lenders will check, your rental payments do matter.

Showing you've always paid your rent on time and are not in arrears will help your application as it shows you have the financial discipline and experience needed to meet potential loan repayments. 

Ask your property manager for a rental ledger, or to provide a schedule of the rent you have paid, for at least three to six months (preferably 12 months) to forward with your other paperwork to your lender.

Alternatively, or as well as, you can ask your property manager for a rental history letter - sometimes known as a rental commitment or rental reference letter - or a proof of rental payment certificate.

However, even with this detail, you will still need a home loan deposit and it's important to note that not all lenders will be moved by your regular rental payments.

Using rent as "genuine savings"

Going one step further again is using the above rental proof as "genuine savings" (savings or investments and shares that you've diligently put aside or looked after over several years, or at least six months - as compared to a lump sum inheritance, the sale of an asset, or help from the Mum and Dad Bank).

Some lenders are now also accepting rental history as "genuine savings"  and as such, proof of your regular payments is crucial.

But again, you will still need at least a 5% home loan deposit and it's worth remembering that only a few lenders accept this policy.

Plus, lenders will still need proof of some solid, "genuine savings".  

... and don't forget....

Shared accommodation tenants as well as those lucky enough to be living rent-free at folks' or friends' places can also benefit from their rental seasons.

Shared accommodation tenants

To use your rental payments as "genuine savings", you need to be the only one listed on the tenancy lease agreement.

However, if this can't be arranged, you may only need to notify the lender what portion of the rent you're paying, with bank statements or similar to back you up.

Either way, you will want to ensure your lender knows exactly how much rent you're paying so check with them about what they'll need from you.

You may have to go back to your property manager to obtain further proof to send to the lender.

Rent-free tenants

If you've been living rent-free, the rental payments you've never made can still help you.

Your lender will simply factor in these non-rental payments - known as notional rent - into your mortgage application, based on where you currently live.

Notional rent usually adds up to around $650 a month or $7,800 a year, so those in this situation should be prepared to have an even higher deposit and better credit score etc than those actually paying rent.

We're here to help

Whatever home loan road you wish to take, we’d love to help you travel it!

We can find you the best home loans from more than 40 of Australia’s biggest banks and specialist lenders and we can also help you refinance your loan to help you keep more money in your pocket.

So, give us a call today at Lending Loop.

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