Servicability, income from a share portfolio

Discussion in 'Loans & Mortgage Brokers' started by Harry30, 1st Oct, 2018.

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  1. Harry30

    Harry30 Well-Known Member

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    How do banks assess income from a share portfolio in their servicability calculations? Is it shaded in any way or do they just take 100% based on the average yield? And do they take account of the percentage of franking in the dividend income and hence the lower tax v other income.

    Assume there is no debt on the share portfolio nor margin loan attached to the shares.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    varies from bank to bank.
    Generally shaded and they won't take it into account until received 2 years or more
     
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  3. Harry30

    Harry30 Well-Known Member

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    Hmm. The idea of shading say rental income was to account for the expenses (20%) associated with owning property. Makes sense. But this is not the case with shares. The pretax gross yeild is equivalent to the pretax net yield.

    What if you own a broad based index fund instead of individual shares? Is the policy the same?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    same.
    I guess the shading is to take into account fluctuations - as easier ability to sell.
     
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  5. Harry30

    Harry30 Well-Known Member

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    While prices fluctuate, dividend income is remarkably stable, especially if you have a broad based, diversified index fund. Anyway, I guess I really should stop trying to find impeccable logic in banks’ policies, and just accept that the policy is the policy.
     
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  6. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    As a general rule, most lenders only use 80% of the income. A few still want a few years evidence of the income, but more often lenders are okay with simple share statements.

    The challenge can be that some lenders ignore franking credits. This means that when combined with the 80% shading, you're only getting about 56% of the income. Combine this with various other servicing policies and it can rather tricky on what will and won't work best.
     
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  7. Hodor

    Hodor Well-Known Member

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    VEU for example had a dividend of $1.11 in 2017 in 2016 it was about 31% higher at 1.46 despite the price improving through 2016 and 2017

    STW still has a fair bit to do before reaching the levels of the four years before the GFC.

    Relative to share price they are stable vs the benchmark of say wages (the main source of income for most people buying a house) not so much.
     
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  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Dont forget that if there is a margin lend in that mix, usually dead :)

    ta
    rolf
     
  9. Harry30

    Harry30 Well-Known Member

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    So, if improving servicability with the banks was your sole consideration, and you had (say) $500k to invest, you are best to buy a $500k residential IP and not a $500k share portfolio as you would get immediate benefit (from servicability POV) from the IP rent (80% after shading) but would be waiting maybe 2 years before you could count any of the dividends from the share portfolio.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This is probably the case. You could potentially even squeeze it out some more by paying down an existing loan - the one with the shortest term left.

    Paying $500,000 off to borrow $500,000 may sound like it doesn't make sense but the new loan term will have a 30 year term and the existing one will have a shorter term so the repayments would be different.
     
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  11. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Not an easy question to answer, a lot of it depends on the bigger financial picture. With a few lenders, a $500k share portfolio will service better than the investment property, but if there's more loans also in the mix, then the share portfolio probably isn't going to help much with the lenders that treat that portion better.

    I can think of plenty of scenarios where it might go one way or the other. It's a real minefield.

    If your profit from a share portfolio is from share trading, then you're going to need at least 2 years of tax returns to demonstrate the income over an extended period. If you're simply claiming income from the dividends, then a simple statement from the management account will often be sufficient with many lenders. You may need to wait a little for the dividends to be issued, but certainly not 2 years.
     
  12. Harry30

    Harry30 Well-Known Member

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    Peter, zero share trading. Long term buy and hold index funds. Just want to count the regular dividends towards my income.
     
  13. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Easy enough, you'll have statements that prove the income. There's a couple of lenders that are a$$hat's about it, but quite a few that just want the statements showing the income and portfolio.

    Your overall serviceability does require a more comprehensive assessment though.
     
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  14. Redom

    Redom Mortgage Broker Business Plus Member

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    There are some that will work of the total balance of shares/funds (asset size) and apply a deeming rate. Usually lower income rate taken, but easier to evidence. Deeming rates are around 2%. This is the case regardless of whether your portfolio is weighted to growth or income stocks.