Dual Occupancy – a Finance perspective

Finance revolves around two main issues. Serviceability and Security.

Follow along as we look at how these impact on potential Dual Occupancy Property financing.

Serviceability is the testing of your financial position against a set of specific parameters mandated by the Bank. How you fair against this test depends on your particular situation. By any measure income is the key to meeting serviceability standards on all levels because income provides the means to cover your commitments. In addition, your income provides reserves for any unexpected expenses. It is this ability to meet the Banks servicing standards that will ultimately determine how much of a loan you can get.

All other issues are secondary. For example, you can have the best property in the best postcode and the most stable and secure job but if your income is not enough to meet the Bank’s required minimums, they just won’t lend. It’s really that simple.

The conditions under which you borrow are not tied to the interest rate advertised by the Bank. Let’s get that perfectly clear. Just because low interest rates are advertised doesn’t mean credit is flowing freely nor are Interest rates an indication of your ability to borrow either. The relationship between commitments and income and what guidelines the Bank has in place relating to your circumstances is what determines your capacity.

Income remains the key to leveraging property.

In the current environment income unlocks serviceability and access to equity requires higher and higher levels of income due to the tightening criteria used on borrowing capacity calculators. To match the stricter criteria Lenders are applying, the main focus for the investor, should be to increase income.

There are two main ways to improve your income.

You can increase your salary by earning more and you can reduce debt. Both options create the same result which is a better balance between earnings and expenses. You could earn more by getting a raise, changing jobs for another better paid position or increasing the rent on your investment properties. Reducing debt would mean repaying loans or selling property in your portfolio.

As an example, this could involve something like selling an underperforming property and replacing it with another property with superior rental yield. Is it time to move with the times and adjust your holdings to reflect the new regime or do nothing because the Banks are making it tough?

Where do dual occupancy properties fit in?

Dual occupancy properties create more rental yield than other residential types so immediately you should be in a better position than before. Another plus is that the general lending criteria is basically the same for dual occupancy properties as for other residential property.

Assessing your financial position and determining borrowing capacity is the first thing to do. Keep in mind that I/O (interest only) loan products over 80% LVR (loan to valuation ratio) are hard to find these days so it’s reasonable to consider P& I (principle and interest) if you need a high LVR loan.

Banks therefore price their products to funnel potential business to P&I rather than I/O. 

This slow push to P&I has been brought about by APRA forcing the Lenders to regulate their investment lending levels. The explanation by APRA that P&I results in growing equity in property is correct but equally misguided as the extra funds would be far better utilised by reducing Home Loan debt. 

However, it seems inevitable that regulatory change will bring about P & I as the new normal. In the interim, investors should get used to the constant changes.

Obviously, Lenders like to verify everything so make sure you have separate leases in place for each tenant of a Dual Occupancy property and it is a good idea to have separate rental estimates. It’s also important for the property to have separate metering to enable separate billing of gas and electricity. All of this is to demonstrate to the Lender that there are indeed two separate dwellings, even if they are under one roofline.

This brings us to the next issue that plagues investors.  Valuations.

Dual occupancy can sometimes cause valuers some consternation even when a Contract for Sale is provided. That’s because normally, valuers are looking for comparable sales, similar properties that they can use to get an idea of the value in that location. As you can imagine it may be difficult for a valuer to hang their hat on a value for which they can find no direct comparisons.

Difficulties with valuers is nothing new in this current environment so overcoming the issue is the same as normal properties.

This emphasis from the regulators to pressure the Banks into reducing Investment and I/O Lending means investors will have to conform to the new regulations. How long this will last is anyone’s guess but with long term growth rates predicted to remain low, the urge to improve one’s financial position remains strong.

Finding ways to continue to invest, no matter what the economic environment dictates, is always on our minds.

Let’s face it, there are two avenues open to us at the moment. One is to find solutions to the obstacles of the day while the other option is to do nothing.

Why not make an appointment with one of our experienced Mortgage Advisors to discuss how a dual occupancy property could benefit your portfolio:

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Investors Direct Financial Group

Investors Direct Financial Group (IDFG) was established in 2001.
Our mission is to help our clients achieve and maintain their financial freedom.

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