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.
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Thanks for the refresher post Corey.
Just an update on this – a number of lenders have been removing/looking to remove their lodoc products for commercial lending. Interestingly the lease doc products which provide the best bang for buck in terms of extending your borrowing capacity have not been limited – and actually had more broader policy features to allow for larger loan amounts etc.
I would note that even if you’ve got a constrained borrowing capacity you may still be able to use full doc cost effective commercial lending. With the very different borrowing policies in commercial compared to residential lending, some lenders still calculate existing at the actual repayments made and not at higher buffered amounts etc. As an example – we recently completed the finance package for a client who has <200k borrowing capacity left for residential lending, but instead we secured lending for them to purchase a commercial property @ 1.5mil @ <5% interest rates, 75% LVR with a 25 year loan term, instead of the more prevalent 15 year periods a number of lenders are offering.
Just out of curiosity about the deal you mentioned above.
Did the borrowing, purchase and cashflow achieve an improved servicing overall for your client so that
he/she can continue investing more easily in the future?
Good question. I think I’ve explained this in another thread you’ve asked similar – effectively with commercial it’s possible to still borrow indefinitely so long as you have an overall neutral portfolio in real terms. In this scenario the borrower can indeed continue to borrow as the new transaction isn’t seen as a burden in further transactions.
Residential lending rules are completely different with regulator requirements making it nigh on impossible to have a positive improvement to your borrowing capacity with a purchase unless its effectively a majority cash purchase – which defeats the purpose of using an asset class which benefits from being able to effectively leverage.
I happened to speak to my broker today about using positive cashflow from commercial deal to improve
Not sure if what he said was due to recent tightening or what, but I was told even for commercial
lenders they also stress testing an investor’s all other existing borrowings, including resi and
commercial to arrive at new servicing for a new commercial loan!
The other thing he said was, to improve servicing it will be best to be able to demonstrate other
regular source of income, such as shares dividends, to lenders. He went on making an interesting point
that (again may be due to the recent tightening but I am not 100% sure) such alternative income, as long
as it’s not from yet another investment property (resi or commercial), will be assessed more favourably
vs positive cashflow rent income.
If above are true, it seems a debt recycling strategy is more critical in demonstrating one’s servicing
power and therefore may be viewed more favourably by lenders?
It’s not about tightening – your broker probably just isn’t as familiar with commercial or has access to non-stress tested products. The original post still remains the same in terms of options with lease doc and even full doc without stress testing of existing commitments.
As per dividend strategies – that can help. Overall you will need to show 1-2 years of tax returns showing the dividend income and have this shaded down to a lesser amount (ie 80% of the income received). It’s effectively treated the same as other income but with more strenuous evidence requirements (the tax returns than just a statement from a PM or lease agreement) – so I wouldn’t say its any more favourable.