How do banks assess Dividends from shares?

Discussion in 'Loans & Mortgage Brokers' started by Archaon, 5th Sep, 2017.

Join Australia's most dynamic and respected property investment community
  1. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Hi All,

    As above, curious how banks assess them when working out borrowing capacity?
    Are the dividends considered to be a consistent income per year, or is there risk attributed?
    Are the dividends geared at all when being assessed?

    Regards,
    Arc
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    It depends a bit (a lot) which bank.

    A deeming rate may be applied which works out to 2.5% or something silly.

    Otherwise, tax returns, financial planner letter, deposits into account or a combo of these can be used. Income will usually be shaded to 80%.

    Some lenders will want to see 2 years history, and margin loans will (usually) be included as a liability.
     
    Ross Forrester, MorganHB and Archaon like this.
  3. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Thanks Jess, may I ask what a "deeming rate" is?
     
  4. MorganHB

    MorganHB Well-Known Member

    Joined:
    8th Dec, 2015
    Posts:
    113
    Location:
    Sydney
    Exactly what @Jess Peletier said - assuming these are publicly listed shares! Some banks may not even consider them because they're deemed 'non-recurring' and 'non-consistent' income (what a joke).
    If its from private companies, then thats ok...some banks may require recourse via a guarantee...others not so much ;)
     
    Archaon likes this.
  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,130
    Location:
    03 9877 3000
    I've generally found that lenders are very unreliable on this. It's simply better to avoid relying on dividend income if it can be helped.

    Say you've got a choice of two lenders, one whose serviceability works without the dividends and another that needs the dividends to service. Chose the one that doesn't need the dividends, it'll help you sleep better until the loan is approved.
     
    Archaon and Jess Peletier like this.
  6. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Yes, publicly listed, via LIC/ETF.

    Regards,
    Arc
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    The income the lender deems appropriate. ;)

    I'm actually serious. It's like with rental income they'll use a max of 6% regardless of the fact the property is actually earning 10%.

    I think currently the deeming rate is about 1.75% from a quick google. CBA uses the rate of one of its pension accounts.

    Like Peter, generally I ignore share income for servicing unless it contributes a really significant portion of the clients income. In most cases it doesn't.
     
    Terry_w and Archaon like this.
  8. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Thanks for all the informative replies, currently going through scenarios to increase my income as my job doesn't really have significant wage growth potential.

    I can tick income from shares of the list at this stage

    Regards,
    Arc
     
  9. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    A second job would be the best way. 100% of income :)
     
  10. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Aren't casual jobs considered less secure and therefore not assessed at 100%?
     
  11. channon

    channon Active Member

    Joined:
    18th Jun, 2015
    Posts:
    29
    Location:
    Sydney
    ANZ uses 6% of portfolio value then take 80% of that. So if you have 100,000 shares and share price is $10 then they will take your gross income as $60,000 x 80% = $48,000 regardless of dividends actually paid.
     
    Archaon likes this.
  12. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Would love to have 1mil worth of shares, haha, may be some time until that eventuates .
     
  13. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    Depends on lender - you'll need at least 3 months in the job to use the income, but many lenders will take this at 100%.
     
    Archaon likes this.
  14. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,896
    Location:
    Newcastle
    Looks like I'm getting myself a second job!

    40% of my current assessable income is from OT/shift allowances.
     
  15. MorganHB

    MorganHB Well-Known Member

    Joined:
    8th Dec, 2015
    Posts:
    113
    Location:
    Sydney
    Ah nice!! yeah I know CBA you basically have to declare yourself as a sophisticated investor and show similar year on year dividends that dont move much (ie they're consistent).
    As @Peter_Tersteeg you might as well forget it. If you're relying on this for income to service, you're starting to get desperate o_O
     
  16. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    Some lenders will take 100% of this, also, so worth looking into some of the smaller lenders if you value your evenings. :)
     
  17. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    Not necessarily - I had a client with a decent size portfolio that had not been established long, and we were able to use the income from it. Sometimes it can depend who you get on the day most probably.
     
    MorganHB likes this.
  18. S.T

    S.T Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    638
    Location:
    Melbourne
    How about if you own bank shares for the bank you're trying to borrow from?

    Also, curious what would be significant dividends to make it worth while, 20% of income? So earning 80k payg and 20k dividends?
     
    Gypsyblood likes this.
  19. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    If there was $20k in dividends and servicing was tight I'd definitely look to use this. If servicing was tight I'd use $2000 if it would get the deal over the line, but usually there are better ways to achieve this - by reducing CC's and so on. It's not hard to find an extra $2k usually.
     
    S.T likes this.
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Many lenders also have concerns investment income is not assured of repetition. The shares could be sold. Each situation is different.

    I have a client with a substantial testamentary trust and another with a reasonable portfolio ($100K+). Both produce good div income. The TT income is counted by that lender as the TT has a clause that prohibits use of the capital. The other person has had to work to find a lender that will count the income. The best he found was one which allowed 75% of the cash value as they consider a tax shortfall could occur.

    Some shares also have uncertain dividend history and are less likely to be allowed at least in full...For example - Telstra. They have announced a sizeable reduction over past div history. Other companies have an inconsistent div history eg Qantas.

    I reckon a good broker is best to assist such issues. They should know lender policies and also how to push the case
     
    Gypsyblood likes this.

Price Accounting provide investor + developer tax services world and Australia wide for your property and all tax issues. Contact Paul@PFI below for our new client pack and quoted pricing + client portal access. Trusts, Co and SMSF are our specialty.