I’ve mentioned this type of product a few times and find that quite a few investors aren’t aware that it exists, or how exactly it works. In the environment that APRA has created, this is can be a handy pathway for investors who have substantial equity but no capacity to borrow through traditional means.
In the commercial space you’ll generally find three tiers of products
No Doc/Lease Doc
The name is self-explanatory – full documentation is provided to verify income, assets and liabilities etc. Generally this will require 2+ years of financials for self-employed applicants, pay slips for PAYG. This is your standard type of loan in all types of lending within the property market.
A step back from Full Doc – Lo Doc products can have less strenuous verification requirements in terms of income verification. This may include accountant declarations of income, BAS/Bank statements to verify business income instead of fully lodged tax returns etc.
Generally self-declaration of income without any other form of verification, can have minimum lease requirements or be fully dependent on a signed declaration of income by borrower. Interest rates to the upper end of the market, lower LVR’s.
For the most part it’s most practical to utilise products in the Lo doc or Lease doc space, than go into the true No Doc product sphere.
No income requirement, just require lease – in many cases just 12 month remaining on a lease required. Fairly standard LVR’s around 65%, and rates mid 5’s to mid 6’s depending on the lender. Potentially loans can include IO periods and 25 year loan terms.
There are some blurring of the lines between products, some Lo Doc are almost No Doc in nature and vice versa.
Why can No Doc/Lease doc be particularly useful
Extends borrowing capacity for investors impacted by APRA’s intervention into serviceability models for lenders
Allows self-employed applicants to borrow if their financials are not in a position to be used in the Full Doc space
Where do commercial products products differ from Residential lending?
Upfront costs – valuation, legal fees, establishment fees
Exit costs – DEF not illegal, so can have substantial penalties for refinancing/selling quickly
No offset accounts – though many have redraw available.
An Example where Lease Doc can enable investors to continue borrowing
Joe Blogs, a successful restaurant owner of 15 years decides he wants a change of lifestyle – sells his business for $1,500,000 so he can stay home with his growing family. He has a small portfolio of residential investment properties, has a small mortgage on his PPOR and has no intention of going back to employment – however he would like to continue to invest.
Joe finds an industrial site for $1.6 million that he would like to purchase, with a current tenant paying $120,000 on a 5x5x5 lease, with 2 years remaining.
How do the figures look?
$1,600,000 Purchase price
$102,112 Government charges + solicitor fees
$960,000 Amount of Funding sought LVR 60%
5.89% Interest Rate
2.0% Sensitised buffer rate
7.89% Rate used for servicing
$75,744 Sensitised Interest Expense
$120,000 gross lease income
$10,800 Outgoings (lease has landlord paying outgoings)
$109,200 Net Lease income for servicing
Net Position: $33,456
The end result is that Joe is able to use a 960k loan to grow his investment portfolio further, gains a positive cash flow position maintains future borrowing potential through these products so long as sufficient deposits are provided. In this scenario Joe would be eligible for a 25 year loan term with 5 year interest only period.
Whilst not suitable for everyone, the Lease/No/Lo Doc market is providing opportunities to investors to continue to expand their portfolio in the current market, whilst still maintaining competitive rates and product features.
*example and figures used are descriptive and may not be available to all borrowers. Specific advice can only be determined by assessing your specific individual circumstances.
See this article and others at:
http://www.precisionfunding.com.au/lease-doc-commercial-or-how-i-learned-to-love-lease-doc-to-continue-investing/RussianAussie (QLD)Participant@russianaussieJoin Date: 2015Post Count: 20
There is – primarily they’re for self employed applicants however.
For the most part they still have a lot more requirements than the Commercial side, and the spread between full doc and lo doc rates can be substantial, depending on the verification requirements.danwattoParticipant@danwattoJoin Date: 2007Post Count: 9
Do the lease docs require a personal guarantee from the director?
Or from the owner if in personal name?
They all have a generally guarantee if in a trust/corporate structure. Usual borrower terms if in own name (who would put it in their personal name anyway?)danwattoParticipant@danwattoJoin Date: 2007Post Count: 9
So the advantage is only servicability.
But sounds like you still get a CRA hit as guarantor that you must declare for future personal credit apps?
Of course – as a responsible lender you should be declaring all debts you are liable for in any case!
The whole benefit of this line of product is to extend your borrowing capacity, where you might have $0 capacity in resi terms, but effectively $unlimited in this space.