Loan Tip: Increasing Borrowing with Common Debt Reducer Strategies

For serviceability calculations most lenders will treat the total loan as a debt of a single person even where there are additional borrowers. This is because each borrower is liable for the whole debt legally speaking.

However, some lenders, in some situations will take the borrowers notional share of the debt, and not the full debt, based on ownership percentages.


Example

Homer and Marge have an investment property together with ownership as 60/40 tenants in common with Homer owning the 60%. The total loan is $600,000. The property rents for $600 per week.

Homer then goes out and buys an investment property solely in his name. He goes to the first lender who assess him on the basis of having a $600,000 loan but only $360 pw rent. This is because he is liable for the whole debt if Marge stops paying, but his taxable income from the rent is only his share – the 60%. This means he cannot service the loan – or I should say he cannot pass the bank’s serviceability test.



He goes to a broker then who tells him about Common Debt Reducer type policies and they choose another lender which will assess him as owing just his notional portion of the debt. In this case he owns 60% of the property and the total debt is $600,000 so his portion of the debt would be just $360,000 So for serviceability purposes he would be assessed as owing $360,000 and receiving $360 pw in rent and this increases his borrowing power and he can qualify for another loan.


Note that this would only be a benefit if there was one loan with 2 (or more) borrowers and one (or less than all the borrowers under that loan) was borrowing. If both Homer and Marge where borrowing for the second property, in the above example, there would be no difference in borrowing power.

 

Hi Terry, need your help regarding loan for residential house. Is there some other way to reach you?