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Impact of share (ETF) dividends on serviceability

Discussion in 'Property Finance' started by Observer, 15th Sep, 2016.

  1. Observer

    Observer Well-Known Member

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    So the question is how do different banks treat income from share (ETF) dividends on investor's serviceability? I'd image different banks have different policies regarding this. Please provide examples if you now some.

    I've got a situation which is becoming more and more common for property investors these days when there is plenty of equity but it's becoming harder and harder to access it because of the serviceability (APRA) restrictions. As I'm getting closer to the wall I'm seeking the ways to get around this (or rather defer it as ultimately we'll all hit it sooner or later).

    I'm considering/doing property development to manufacture some equity as well as improve the serviceability. However, I prefer doing this using other people's money since for most of us here one of the key ingredients of property investment is having the leverage. If there is no leverage investing in high yielding shares (ETFs) looks more attractive from passive income producing perspective (the other nice benefit is diversification from property).

    The option I'm considering is investing money sitting in PPOR's offset account in some high yielding ETFs (e.g. VHY or something similar; haven't done extensive research yet). Of course as per @Terry_w suggested strategy I'd first do a split, repay it with the money from offset and reborrow to invest in this case for the interest to be tax deductible.

    The way I see it is that money sitting in offset is not considered by the banks as a form of income. Whereas in case of share dividends the banks are more likely to consider it when evaluating one's serviceability (I know that some banks accept statement of account while others need 2 years tax returns to do this).

    Some basic numbers. Let's say I invest $100k in shares yielding 5% pa. Thus, $5k pa dividend income. How much more money can banks lend on that income?

    Please feel free to share your thoughts.
     
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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I have westpac's calc open at the moment and they will take 80% of dividend income. I rarely have clients with shares and serviceability tightness so I have not much experience in this area, but they will want to see some confirmation of ownership and dividend payments such as a dividend statement. I don't think franking credits are taken into account.

    This could help serviceability.

    Example $100,000 in PPOR offset. PPOR loan $500,000

    Pay down the PPOR loan to $400,000 and split out another $100,000 loan.
    This will change two things itself - lower non deductible debt and higher deductible debt. This effects serviceability favourable with some lenders.

    Buy $100,000 worth of shares - this may give say $5,000 in dividends which can boost serviceability as well.
     
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  3. D.T.

    D.T. Adelaide Property Manager Business Member

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    They usually want to see 1-2 years of dividend payment history.

    Everyone's circumstances are different but you might get more servicability boost out of sinking the 100k into your poor mortgage.
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    In my experience this can work but not in a massive way - both by having the higher negative gearing via more deductible debt, and also the income from the shares. Bear in mind that some lenders will only count certain shares, and will cap any income to the deeming rate which is currently 2.5% or thereabouts.

    Some will also want 2 yrs history/tax returns.

    If it's 'just' to increase servicing and you wouldn't otherwise invest in shares/managed funds, I'd suggest against it as the risk is significantly higher than having cash in offset and you could end up decreasing your 'actual' wealth for a small increase in servicing.
     
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  5. Observer

    Observer Well-Known Member

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    Thanks @Jess Peletier. It's not just to increase servicing but rather a mix of reasons. I'd definitely consider investing more in ETFs later on as the portfolio grows for diversification and hassleless passive income.
     
  6. Observer

    Observer Well-Known Member

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    Do you guys know what part of ETF dividend income CBA/NAB take for servicing? Is it about the same as Westpac's 80%?
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Last one I did CBA used a deeming rate of 2.5% and 80% of that. Didn't have 2 yrs history though.
     
  8. Observer

    Observer Well-Known Member

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    @Jess Peletier The other thing to mention here is if I proceed with buying ETFs that will be a long term hold and I won't be selling anytime soon (maybe never). One of the benefits that I see here is that even if the value goes down in short/mid term the dividends don't go down as much providing constant passive income. Thus, I consider the risk in this case quite low.
     
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  9. Observer

    Observer Well-Known Member

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    Thanks Jess. Does that mean as per the above scenario with investing $100k they will see the income as $2k?
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Yes, exactly.
     
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  11. Observer

    Observer Well-Known Member

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    @Terry_w Does Westpac also use a deeming rate of 2.5% and then 80% of that? Or is it 80% of entire dividend? E.g. $5k * 0.8 = $4k or $2.5k * 0.8 = $2k?
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I don't know what the policy is. One previous one with Westpac I got them to use the actual figures based on dividend statements.
     
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  13. Observer

    Observer Well-Known Member

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    @Terry_w Could you please comment if my understanding of the following is correct?

    Let's say I invested $100k in ETF in my name at the beginning of financial year. Then, end of financial year I notice that there was significant fall in the price and the current value is only $80k. Let's say I sell it all before the year end which triggers a CGT event (which is actually $20k loss). From my understanding and according to ATO's website that capital loss can be claimed against any capital gains in the same income year or if capital losses exceed capital gains in an income year, the loss can be carried forward and be deducted against capital gains in future years.

    Capital gains tax | Australian Taxation Office

    Providing that's correct, investor can re-buy the ETF immediately after sale (if that ETF was supposed to be a long term investment anyway) at about the price of sale (as it usually does not fluctuate much over a short period of time). At the same time the investor will be able to offset some of the future capital gains.

    Does that sound right? If so, I suppose it reduces the risk even more as the loss (if any) will be offset.
     
  14. Brady

    Brady Well-Known Member

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    CBA 80%

    Evidence must be provided confirming the balance / holdings of investments held from any of these sources.

    This can be verified through 1 of the following options:

    1. Statement / letter less than 60 days old immediately preceding the date of the application from the entity in which the funds are invested detailing the current value of the investment
    2. Statement / letter less than 60 days old immediately preceding the date of the application from a recognised brokerage, e.g. CommSec, detailing the current balance / holdings of the investment with the value of the investment to be confirmed using the current 'sell' rate.

    • The current deeming rate is to be applied to the value of the existing investment asset to calculate the annual investment income amount that is to be used for servicing. If the current deeming rate is higher than 5%, the maximum percentage that can be used to calculate the investment income is capped at 5%
    • The deeming rate is equivalent to the top tier interest rate used for the Pensioner Security Account

    Current deeming rate is 2.25%


    IMPORTANT NOTE **** Strong application there is change of being able to use up to 5% - would suggest overall application would have to be strong, potentially shared owned for a period of time or be strong assest
    • Applications will need to be assessed by an appropriately authorised PCAA holder when the investment asset is generating a return which is greater than the current deeming rate and the customer wishes this to be used for servicing (subject to a maximum cap of 5%).
     
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  15. Observer

    Observer Well-Known Member

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    Thanks @Brady! So it'll basically be up to them to decide on a case by case basis.
     
  16. Brady

    Brady Well-Known Member

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    The deeming rate is policy, but like most things with CBA they will look a lot case by case - especially when policy states they will look at it case by case :)

    So current 2.25% with potential up to 5%
     
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  17. radson

    radson Well-Known Member

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    Is this not a wash sale?
     
  18. Observer

    Observer Well-Known Member

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    What is a wash sale? :)
     
  19. Observer

    Observer Well-Known Member

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    OK, after some googling looks like ato does not like it :). Smart guys.
     
  20. S0805

    S0805 Well-Known Member

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    @Observer or any brokers here. I'm wondering in numbers term in best case scenario lets say lender considers 5k dividend as income for applicant. how much will $$ it improves one's servicability. I know its hard to answer other than depends...but consider someone who has hit the wall with servicability. cheers